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Short Interest Hits New Record -- Again


Perhaps all the liquidity floating around allows short interest to do nothing but go up and up.


NYSE short interest for the period between mid-February and mid-March gained 2.07%. This gain was not a new record as it is about 540M shares lower than the peak reached last November. The value of the NYSE composite index gained 2.05% during the same period.

NASDAQ short interest rose to a new record, spiking 6.85% in the space of a month. The new record is about 250M more new short shares since the previous record last October. The NASDAQ Composite was up 1.56% during the same period.

I've puzzled aloud for some time now about how the short sellers can manage to have added a little over 2.2B short shares in the NASDAQ since January 2003 while the NASDAQ Composite has gone up 61%. The numbers for the NYSE composite are less daunting, but still not the right direction: Short interest up 600M shares while the NYSE composite is up 56%. Someone smarter than me is going to have to explain that (and not just by the "they're hedged" answer 'cause I'm dimwitted enough to need a more thorough explanation than that).

Perhaps all the liquidity floating around allows short interest to do nothing but go up and up.

The graph I've been using appears below. It uses January 2003 as an index year (for no reason other than that it 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 totals versus composite index performance

The 160 biotech stocks on the NASDAQ Biotech Index (NBI) saw their short interest increase 7.61%. This is the second biggest jump since I started tracking in the beginning of 2004 (March 2004 +8.25%). The NBI gained about 3.15% during the same period. Short interest of the NBI as a percentage of overall NASDAQ short interest is now at 12.51%.

NBI short interest increased about 50M shares, with a few notable contributors. Last month, Amgen's (AMGN) short interest dropped 9.7M. This month it gained 12.7M shares. Human Genome Sciences (HGSI) short interest rose 6.1M shares to 20.4M.

Short interest in the IBB, the iShare ETF for the NBI, gained 20.66% on top of last month's 1.62% and January's 23.94% gains. Short interest in the IBB is now higher than at any time in the last twelve months. The BBH, a HOLDr ETF approximating the AMEX Biotech Index (BTK), saw short interest drop 20.64%, the ninth drop in the last 12 months. Short interest in the BBH is now the lowest it has been in the last twelve months.

It is often argued in these pages that paying attention to short interest is futile. I'm guessing the theory is that 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 that 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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