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Minyan Mailbag: Why Is Short Interest in IBB So High?
Short interest in this biotech ETF is high, but it doesn't necessarily mean investors are bearish on the sector.
Michael Comeau    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Michael,

Why is short interest in the iShares NASDAQ Biotechnology Index ETF (IBB) so high?

Could that be fuel for another extension higher in biotech?

-Richi
e

Richie, thank you for the question.

The short answer is... maybe.

Short interest in ETFs is a complicated subject, and there is a great deal of confusion around the share creation/redemption cycle, and the resultant data collection.

The prime example of this is the SPDR S&P Retail ETF (XRT), which has 8.5 million shares outstanding, but 30.2 million shares sold short, according to Bloomberg.

How that happens, I do not know -- but it is indicative of a basic data quality issue.

But back to IBB.

According to iShares, IBB has 19.95 million shares outstanding. NASDAQ's latest short interest figure shows 10.3 million shares, or 52% short, which is extremely high.

For the sake of argument, let's assume the short data is accurate.

On the surface, this assumes an extremely high level of pessimism -- it certainly would if we were talking about an individual stock.

However, keep in mind that in addition to normal shorts betting against the biotech sector, IBB is commonly used in pairs trades against long positions in individual biotech stocks.

Plus, IBB's 10.3 million shares sold short, at current prices, accounts for just $2.8 billion in value. That's a tiny fraction of the trillions in biotech stock capitalization out there. Sector ETFs can move markets in the short-term, but in the bigger picture, this is an irrelevant amount of money.

Therefore, you won't get much of a gauge on biotech sentiment from short interest figures on a single ETF. You'd be much better off taking a look at the numbers for individual stocks.

However, if you are considering going short biotech, remember two things:

1) In recent quarters, biotech has been the best sector in terms of beating earnings and revenue expectations. Sector valuations are fairly high but the fundamental momentum is there.

2) Deal/activist activity in biotech and pharma has been rampant. FactSet just put out a note yesterday showing that major hedge funds have been aggressively adding biotech stocks as M&A has heated up.

Happy hunting!

Twitter: @MichaelComeau

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Minyan Mailbag: Why Is Short Interest in IBB So High?
Short interest in this biotech ETF is high, but it doesn't necessarily mean investors are bearish on the sector.
Michael Comeau    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Michael,

Why is short interest in the iShares NASDAQ Biotechnology Index ETF (IBB) so high?

Could that be fuel for another extension higher in biotech?

-Richi
e

Richie, thank you for the question.

The short answer is... maybe.

Short interest in ETFs is a complicated subject, and there is a great deal of confusion around the share creation/redemption cycle, and the resultant data collection.

The prime example of this is the SPDR S&P Retail ETF (XRT), which has 8.5 million shares outstanding, but 30.2 million shares sold short, according to Bloomberg.

How that happens, I do not know -- but it is indicative of a basic data quality issue.

But back to IBB.

According to iShares, IBB has 19.95 million shares outstanding. NASDAQ's latest short interest figure shows 10.3 million shares, or 52% short, which is extremely high.

For the sake of argument, let's assume the short data is accurate.

On the surface, this assumes an extremely high level of pessimism -- it certainly would if we were talking about an individual stock.

However, keep in mind that in addition to normal shorts betting against the biotech sector, IBB is commonly used in pairs trades against long positions in individual biotech stocks.

Plus, IBB's 10.3 million shares sold short, at current prices, accounts for just $2.8 billion in value. That's a tiny fraction of the trillions in biotech stock capitalization out there. Sector ETFs can move markets in the short-term, but in the bigger picture, this is an irrelevant amount of money.

Therefore, you won't get much of a gauge on biotech sentiment from short interest figures on a single ETF. You'd be much better off taking a look at the numbers for individual stocks.

However, if you are considering going short biotech, remember two things:

1) In recent quarters, biotech has been the best sector in terms of beating earnings and revenue expectations. Sector valuations are fairly high but the fundamental momentum is there.

2) Deal/activist activity in biotech and pharma has been rampant. FactSet just put out a note yesterday showing that major hedge funds have been aggressively adding biotech stocks as M&A has heated up.

Happy hunting!

Twitter: @MichaelComeau

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
More From Michael Comeau
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Minyan Mailbag: Why Is Short Interest in IBB So High?
Short interest in this biotech ETF is high, but it doesn't necessarily mean investors are bearish on the sector.
Michael Comeau    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Michael,

Why is short interest in the iShares NASDAQ Biotechnology Index ETF (IBB) so high?

Could that be fuel for another extension higher in biotech?

-Richi
e

Richie, thank you for the question.

The short answer is... maybe.

Short interest in ETFs is a complicated subject, and there is a great deal of confusion around the share creation/redemption cycle, and the resultant data collection.

The prime example of this is the SPDR S&P Retail ETF (XRT), which has 8.5 million shares outstanding, but 30.2 million shares sold short, according to Bloomberg.

How that happens, I do not know -- but it is indicative of a basic data quality issue.

But back to IBB.

According to iShares, IBB has 19.95 million shares outstanding. NASDAQ's latest short interest figure shows 10.3 million shares, or 52% short, which is extremely high.

For the sake of argument, let's assume the short data is accurate.

On the surface, this assumes an extremely high level of pessimism -- it certainly would if we were talking about an individual stock.

However, keep in mind that in addition to normal shorts betting against the biotech sector, IBB is commonly used in pairs trades against long positions in individual biotech stocks.

Plus, IBB's 10.3 million shares sold short, at current prices, accounts for just $2.8 billion in value. That's a tiny fraction of the trillions in biotech stock capitalization out there. Sector ETFs can move markets in the short-term, but in the bigger picture, this is an irrelevant amount of money.

Therefore, you won't get much of a gauge on biotech sentiment from short interest figures on a single ETF. You'd be much better off taking a look at the numbers for individual stocks.

However, if you are considering going short biotech, remember two things:

1) In recent quarters, biotech has been the best sector in terms of beating earnings and revenue expectations. Sector valuations are fairly high but the fundamental momentum is there.

2) Deal/activist activity in biotech and pharma has been rampant. FactSet just put out a note yesterday showing that major hedge funds have been aggressively adding biotech stocks as M&A has heated up.

Happy hunting!

Twitter: @MichaelComeau

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
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