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Mixed Short Interest


A bull could get a complex around here


NYSE short interest for the period between mid-December and mid-January decreased 0.16%. It was down 300M shares from the 8.5B record shares short set in November. The value of the NYSE composite index increased 2.57% during the same period. NASDAQ short interest was essentially flat, nudging up 0.05%. That's the third drop in a row from the record high set in October, though there is less than 60M shares difference between the two counts. The NASDAQ Composite was up 1.86% during the same period.

The graph I've been using appears below. It uses January 2003 as an index year (for no reason other than that was a complete year bull market and the first year where I collected data). I'm not certain the graph is anything more than informational, but I think it is worth pointing out the pattern of the indexed NADSAQ Comp (in dark blue) after each time it was eclipsed by the indexed value of the NASDAQ short interest (light blue).

The 160 biotech stocks on the NASDAQ Biotech Index (NBI) index saw their short interest rise by 1.51% both on the total number and on average. The NBI gained 4.01% during the same period. Short interest of the NBI as a percentage of overall NASDAQ short interest is now at 12.72%, the highest it has ever been.

Short interest in the IBB, the iShare ETF for the NBI, gained 23.94%. This is the first monthly gain since the big bearish biotech bet put on in October. The BBH, a HOLDr ETF approximating the AMEX Biotech Index (BTK), saw short interest gain 11.67%. Both ETFs broke a two-month string of drops in short interest.

It is often argued in these pages that paying attention to short interest is futile. I'm guessing the theory is all these positions are hedged. With the rise in zero-volatility funds, I'm guessing there is some truth to this point of view.

However, short positions and their hedges carry an expense. Dividend payouts, borrowing premiums, margin rates, and derivative costs all make a dent in the P&L. I still maintain this short bubble will matter at some point. I've admitted the rise in short interest will not cause a rally, only accelerate one already underway.

Therefore, short interest is like most of the macro concepts discussed around here (high debt, low savings, Fed liquidity, etc.). Not immediately actionable, but very worthwhile to keep in the back of your mind as a factor in your risk analysis.

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