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NASDAQ Short Interest Hits New Record -- Again


Biotech escapes again!


NYSE short interest for the period between mid-February and mid-March gained 5.5%, breaking the 9 billion mark for the first time. The value of the NYSE composite index lost 8.52% during the same period.

NASDAQ short interest rose to a fourth consecutive new record, adding 11.42% to break 7 billion for the first time. 730 million new short shares were added. The NASDAQ Composite was down 3.89% 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 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).

2003-2006 short interest comparison graph

The 164 biotech stocks on the NASDAQ Biotech Index (NBI) as of the short interest cut-off date saw their short interest increase numerically by 3.71%, but the total is a bad metric for this month because the rebalance added more stocks. The average short interest was flat at up 0.05%. The NBI lost 2.84% during the same period. Short interest of the NBI as a percentage of overall NASDAQ short interest plummeted to 10.98%, down nearly two full percentage points from the peak in January 2006 and the second lowest level since we started tracking the number in February of 2004.

Short interest in the IBB, the iShare ETF for the NBI, dropped 9.98%, the third drop in as many months. The BBH, a HOLDr ETF approximating the AMEX Biotech Index (BTK), saw short interest decrease 13.92%.

For the third month in a row, shorting in the biotech space seemed more selective in the last period than it has been in some time. Most companies saw their short interest drop. In April and May, battleground stocks and some of the "newer" story stocks in the sector saw the larger short increases. In June, our anecdotal observation was the more established biotech saw the increases – sometimes substantial (>20%).

I think one thing is clear about recent biotech short interest: At the sector level, it's not the cause of the recent decline. The decline seems to be driven by sellers abandoning their positions.

It is often argued in these pages that 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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