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Minyan Mailbag


So...short interest is high AND low?


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Toddo et al:

Professor Miller has been tracking high short interest particularly in the four letter names. Yet volatility indices and other sentiment gauges suggest low levels of pessimism. I would have thought that there would be a decent inverse relationship between short interest and sentiment gauges. Any insight from the professorship?

Minyan Matty

Minyan Matty,

You are, indeed, correct that there is a decent inverse relationship between short interest and some sentiment measures.

For comparison's sake, what I did was look at short interest compared to the amount of bullishness displayed in Chartcraft Inc.'s Investor's Intelligence sentiment survey. That survey is a reasonably good proxy for "market sentiment" and it has a history going back to the late 1960's. For short interest, what I used was a de-trended view of NYSE short interest. Since short interest has undergone a steady increase since the 1970's, looking at it with its long-term trend somewhat neutralized allows us to more easily make historical comparisons. I did not use Nasdaq short interest because it doesn't have nearly as long a history as the NYSE data.

Since 1970, the correlation between a 4-week moving average of the bullishness in the sentiment survey versus NYSE short interest was -.20. On a scale of -1 to +1, a correlation of -.20 is relatively weak. However, due to the large number of data points, we can be reasonably sure that there IS a relationship, and it is NOT due to chance alone. Since there is a minus sign in front of the correlation, it means that it is negative - meaning, when one input goes up, the other one tends to go down. So when short interest is high, it has tended to coincide with low levels of bullishness. This makes sense, since when traders are bearish, you would expect them to be taking short positions, and when they are bullish, you would expect them to have covered a good number of their shorts.

Currently, the way I look at short interest, it is neutral to slightly low on the NYSE, which makes sense given the high amount of bullishness in the most recent Investor's Intelligence readings. This conflicts with Nasdaq short interest, which is actually very high. I'm not sure what to make of the difference between Nasdaq and NYSE short interest, other than the obvious suggestion that traders are betting more heavily against the average Nasdaq stock than the average NYSE stock. From a contrary point of view, that would normally make me suspect that tech shares will be in for a period of out-performance (N's over S's, as Toddo likes to say).

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