Short Interest at New Record Highs
Funny how the CW says I am the crowded trade!
NYSE short interest for the period between mid-September and mid-October increased 0.98% to a new record high. The value of the NYSE composite index lost 3.7% during the same period. NASDAQ short interest gained 2.23% to another record high, with the NASDAQ Composite dropping 3.54% during the period.
The big story this month, however, is the explosion in short interest on the 152 stocks that comprise the NASDAQ Biotech Index (NBI). Overall on the NASDAQ, short sellers added about 132M new short shares. An astonishing 53 million (40%) of those came from the 152 stocks in the NASDAQ Biotech Index.
The graph I've been using appears below. It uses January 2003 as an index year (for no reason 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).
Short interest in the 152 stocks in the NASDAQ Biotech Index (NBI) gained 7.26%. Only one company dropped off the list this period, so average short interest was similar at +7.86%. Short interest of the NBI as a percentage of overall NASDAQ short interest is now at 12.19%, up strongly from last month's 11.56%. The increase in biotech short interest goes a long way to explaining the 6.32% loss in the NBI's value.
Beginning in May, I started tracking short interest in biotechnology stocks that ended up on the Regulation SHO Category A and B lists (read more about this here). These stocks were selected because they were members of the NBI at the time the SHO Part Two rule was initiated. Short interest in these stocks increased in the last measurement period by 5.60%.
Short interest in the IBB, the iShare ETF for the NBI, soared by 40.22% adding 3.4M new short shares to reach a total of 11.9M shares last month. The BBH, a HOLDr ETF approximating the AMEX Biotech Index (BTK), saw short interest zoom 21.49% higher to 3.6M shares.
I spent most of yesterday pinging my biotech contacts, most of whom were very puzzled by this large jump in short interest. Even those who are of a normally Boo-ish bent said this seemed more than a little overdone.
I've cautioned before that you cannot ignore the other side of the trade, even (especially!) if you think they are idiots. This monster new short bet gives me pause, as it did nearly every one I spoke with Wednesday. In that sense, it might serve as a short-term self-fulfilling prophecy as those of us who are long biotech put our heads down to try and figure out what the other side of the trade is thinking.
As I said in the Buzz yesterday, if you have any novel ideas as to why this big bet was made drop me a note at David@Minyanville.com.
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