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Exchanges Post Record Short Interest

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NASDAQ 3000? You're kidding, right?

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The NYSE tacks on less than 10 million new short shares this month and the NASDAQ tacks on about 60 million new, both decelerating advances – a pattern we've seen in the last couple of months. Both are new records for the exchanges, a regular occurrence these days.

NYSE short interest for the period between mid-July and mid-August gained 0.09%. The value of the NYSE composite index added 3.04% during the same period.

NASDAQ short interest rose 0.82%. The NASDAQ Composite was up 5.41% 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 that I collected data. I'm not certain that 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 broad separation between short interest on the NADSAQ and the value of the NASDAQ comp appears to be a potential indicator of future market gains over the last 3+ years. If you eyeball it with a bullish bent, for fun only mind you, the pattern suggests that the NASDAQ comp needs to push 3000 to duplicate the previous patterns.

The 168 biotech stocks on the NASDAQ Biotech Index (NBI) index as of the short interest cut-off date saw their overall and average short interest increase by 1.48%. The NBI gained 5.79% during the same period. Short interest of the NBI as a percentage of overall NASDAQ short interest gained slightly to 11.56%.

Short interest in the IBB, the iShare ETF for the NBI, dropped 10.04%, the sixth drop in the last seven months. The BBH, a HOLDr ETF approximating the AMEX Biotech Index (BTK), saw short interest rise 7.15%, the first increase since May.

It is often argued in these pages that paying attention to short interest is futile on the theory that short interest has less to do with bearish bets and more to do with options-related hedging.
John Succo
perhaps makes this case best in a Buzz posting in September.

If the overall short interest tells us nothing, as John suggests, then the difference between the number of outstanding call options and total exchange short interest might be a better number to track because that should be closer to an "unhedged" short interest number that could truly indicate bearish sentiment.

I simply don't buy the idea short interest is meaningless. Here's why:

  • Call selling is itself bearish. I've spoken to enough traders who generate their income in this fashion to know fundamental analysis often plays into their trading strategy. They are more likely to aggressively sell calls when they think fundamentals are weak.

  • Rising markets still hurt. A rising market costs short sellers. If someone runs a short position equivalent to his calls, this is not a winning trade. He or she eats the cost of purchasing the calls and eats the costs associated with borrowing the shares.
  • Short sales have costs. 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've admitted the rise in short interest will not cause a rally, it will only accelerate one already underway. That makes short interest like most of the macro concepts discussed around here (high debt, low savings, Fed liquidity, inflation, deflation, stagflation, etc.). Not immediately actionable, but very worthwhile to keep in the back of your mind as a factor in your risk analysis.

No positions in stocks mentioned.

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