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Nasdaq Short Interest Hits New Record--Again


A return to company-based rather than sector based shorting?


NYSE short interest for the period between mid-February and mid-March gained 1.33%. This gain was not a new record as it is about 450M shares lower than the peak reached last November. The value of the NYSE composite index gained 1.39% during the same period.

NASDAQ short interest rose to a new record, up 1.41% in the space of a month. This is the second new record in as many months. The NASDAQ Composite was up 0.60% during the same period.

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).

Indexed short interest and index values Jan 2003 to present

The 158 biotech stocks on the NASDAQ Biotech Index (NBI) index saw their short interest decrease about 2%, though the average only drop 0.69%. The discrepancy is due to Abgenix and Chiron exiting the index during the month. The NBI lost 7.38% during the same period, paying off for the sector-wide shorts that were put on in March. Short interest of the NBI as a percentage of overall NASDAQ short interest is now at 12.1%.

Short interest in the IBB, the iShare ETF for the NBI, dropped 2.48%, the first drop this year after gains of 1.62%, 23.94%, and 20.66%. The BBH, a HOLDr ETF approximating the AMEX Biotech Index (BTK), saw short interest increase 10.16%, the first gain since January and only the fourth up month in the last 12.

As I scan the list of ups and downs, it seems like the shorting was more selective in the last period than it has been in some time. Larger, more stable companies saw sometimes sizeable decreases in their short interest. The battleground stocks and some of the "newer" story stocks in the sector went the opposite way.

It is often argued in these pages 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, there might be 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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No positions in stocks mentioned.

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