Montreal, Canada

Iceland is punishing Western Europe after engulfing the British Isles on Thursday. Maybe this is Iceland's way of returning some fire to Western European countries after a few large creditors pulled the plug on her leveraged banking system two years ago. The United Kingdom and the Netherlands were primary creditors to Iceland.

The volcanic ash spewing across Western Europe today is causing all sorts of travel disruptions for air travelers with more than 17,000 flights canceled. I was supposed to fly home today from Paris but happily changed my plans yesterday to fly home with Swiss via Zurich. Happy I did.

Are short-sellers heading the way of the dinosaur? A recent report showing a dwindling number of short-sellers, or those investors that bet against the stock market, continues to sharply decline.

The CFTC, or Commodity Futures Trading Commission, recently noted that speculators in the S&P 500 Index futures had a net short position of 72,247 contracts for the week ending March 5th. But just seven days later that figure had plunged to just 6,204 contracts or a dizzying 91.4% decline. What happened?

It's important to point out that broad U.S. and international stock indexes broke above their recent highs in early January last month triggering a wholesale squeeze by short-sellers. The run-up in short positions in February and early March represented one of the biggest concentrations by short-sellers to make a bundle ahead of a market decline; that never happened. Once again, markets bounced back just like they did last summer following a decline of 9% from peak-to-trough in June and early July.

Stocks are selling-off sharply today in the first double-digit point loss for the Dow in weeks. Stocks have been red-hot over the last 13 months with barely a 10% decline from their recent highs.

It could be that as short-sellers exit the market or significantly reduce their shorts that stocks might have only one direction to go next – down. Of course, I have my doubts. This market has proved me wrong over the last year with massive gains amid a successfully orchestrated U.S. and foreign government bailout, courtesy of printing presses at central banks. With credit markets pretty much healed at this point and banks fudging their accounting courtesy of GAAP changes last May, investors have increasingly allocated capital to stocks.

Imagine what happens if investors lose their love-affair for bond funds and opt for stock funds again? Bond funds have seen more than $200 billion dollars of inflows over the last 12 months compared to barely a dollar of inflows or flat inflows for equity funds.

Bill Fleckenstein, probably one of the best short-sellers along with Jim Chanos and David Rocker, recently admitted to bailing out of his shorts: "I'm not short because for the most part I can't find ideas that seem to be working and I think other people might be in the same camp."

After maintaining a short bias for 12 years, including some huge gains from 2000 to 2002 and especially from late 2007 to early 2009, Fleckenstein (Fleckenstein Capital in Seattle) closed-out his shorts last year.

Well, that might be a signal for contrarians or bears. Before today the stock market has gone 42 days without suffering a 1% loss in a single trading session. But the bears are now in hibernation and more bulls might join the rally. Still, you have to wonder how long this can continue…