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Updated Short Interest

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Market cushion increases

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August saw some pretty precipitous declines in the averages on a relative basis. Short sellers pressed their bets (causative or predictive?) as short interest rose.

For those with photographic memories, you'll notice the chart below is different (beyond the addition of August data) than the one I've posted previously. The index values were previously set at the media reporting date of the short interest. This lags the actual data collection cutoff point by about two weeks. It seemed to me when I was updating the tables last week that the date ranges should be the same for the two series.

I've gone back and corrected the data series so the index value data match the same time frame. It made a difference to the shape of the graphs (see last month's article for a comparison). I doubt it would change anyone's conclusions about what has been going on since the base data in January 2003.

Last month I said I suspected we'll see short interest climb for the August data, and it did. Of some interest to my own research team was that almost all of the short interest levels in the 21 stocks we follow closest fell in the August time frame. This despite the overall rise in short interest on the NASDAQ. I've noted on the Buzz the recent rally in biotech seemed to have been triggered by technicals and extended by short covering. A few of my buddies running biotech funds admitted they were picking here and there instead of just sitting on their hands as they had been doing for most of late June and July

Do these data points hint of a sector rotation into biotech? Perhaps, but I'm unsure of what the duration might be. We saw a similar run into the July month-end, only to have it dissipate after the window dressing was complete. I'll have more on this subject in an article later this week.

I suspect we're seeing a short-covering rally here more than anything else. If I'm right, then we'll see the short interest lines turn negative in next month's chart.

position in QQQ

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