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NYSE Posts Short Interest Record, NASDAQ Declines

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Sector based shorting has returned

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NYSE short interest for the period between mid-June and mid-July gained 2.27%. The value of the NYSE composite index added 3.39% during the same period.

NASDAQ short interest declined for the first time in seven months, declining -0.67%. The NASDAQ Composite was down 5.25% 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).

Short interest plot Jan 2003-present

The 164 biotech stocks on the NASDAQ Biotech Index (NBI) index as of the short interest cut-off date saw their short interest increase numerically by 2.62%. The NBI lost 5.11% during the same period. Short interest of the NBI as a percentage of overall NASDAQ short interest rose to 11.45%.

Short interest in the IBB, the iShare ETF for the NBI, dropped 11.48%, the fourth drop in as many months. The BBH, a HOLDr ETF approximating the AMEX Biotech Index (BTK), saw short interest decrease 18.67%, the second decline in a row.

Shorting in the biotech space increased on most stocks – some markedly so. This wasn't reflected in the percentage figures because of some large drops in heavily-shorted stocks. This contrasts to the last three months where shorting was more selective.

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, 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.

No positions in stocks mentioned.

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