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Short Interest Declines on Both Exchanges

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No panic here, dude...

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After slight gains last month, the NYSE and particularly the NASDAQ sheds a fair amount of short interest in the previous measurement period. Whether people simply didn't want to sell technology calls or no longer wanted to be short tech stocks, they closed over 410 million shares worth of short interest.

NYSE short interest for the period between mid-July and mid-August declined 1.00%. The value of the NYSE composite index added 2.02% during the same period.

NASDAQ short interest plummeted 5.86%. The NASDAQ Composite was up 3.23% during the same period.

The graph I've been using appears below. It uses January 2003 as an index year (for no other 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).



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. In the past few of these articles, I noted that if you eyeball it with a bullish bent, for fun only mind you, the pattern suggests the NASDAQ comp needs to push 3000 to duplicate the previous patterns.

The other thing that could happen to close the gap, of course, is an abrupt decline in NASDAQ short interest like we had this month. Still, a 'for fun' eyeballing of the chart pattern suggests at least a couple of months of NASDAQ gains are ahead.

The 167 biotech stocks on the NASDAQ Biotech Index (NBI) as of the short interest cut-off date saw their overall short interest decrease by 4.20% while the average, a truer measurement, dropped by 3.58%. The NBI gained 4.45% during the same period. Short interest of the NBI as a percentage of overall NASDAQ short interest gained slightly to 11.75%.

Short interest in the IBB, the iShare ETF for the NBI, dropped 10.47%, the seventh drop out of the last eight months. The BBH, a HOLDr ETF approximating the AMEX Biotech Index (BTK), saw short interest drop 9.12%, the fifth drop in the last six months.

There is a well-reasoned debate between various Professors here concerning whether short interest data are even relevant in an environment seemingly dominated by zero-volatility/income funds. I maintain, as you probably are aware, that short interest carries both explicit and implicit costs, so it does matter. The higher stocks go, the more it matters. A couple of years ago, I realized the rise in short interest will not cause a rally, only accelerate one already underway.

No positions in stocks mentioned.

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