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Exchanges Post Record Short Interest


I keep my house trailer attached for just these situations...


Same Old News...

The NYSE takes on 340 million new short shares and the NASDAQ tacks on 130 million new. Both are new records for the exchanges, a regular occurrence these days. Please forgive me if I smirk the next time someone uses "bear" and "contrarian" in the same sentence.

NYSE short interest for the period between mid-July and mid-August gained 3.53%. The value of the NYSE composite index added 2.19% during the same period.

NASDAQ short interest rose 1.80% to another record, which would have been the fifth consecutive record absent the slight (49 mln shares) dip last month. The NASDAQ Composite was up 3.69% 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).

A glance at the soaring light blue line representing NASDAQ short interest has to give NASDAQ bears pause. I mean, don't these things always begin with flying house trailers?

That separation has to be the flying house trailer of this chart.

The 168 biotech stocks on the NASDAQ Biotech Index (NBI) as of the short interest cut-off date saw their short interest increase by 1.76%. However, this was driven by the mid-period restoration of five stocks to the index. The average short interest on NBI stocks declined 0.64%. The NBI gained 1.81% during the same period. Short interest of the NBI as a percentage of overall NASDAQ short interest was steady at 11.45%.

Short interest in the IBB, the iShare ETF for the NBI, dropped 1.93%, the fifth drop in as many months. The BBH, a HOLDr ETF approximating the AMEX Biotech Index (BTK), saw short interest decrease 2.63%, the third decline in a row.

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, inflation, deflation, stagflation, 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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