NYSE Specialist Short Ratio


Back on March 25, 2004, we had mentioned a somewhat obscure indicator — NYSE Specialist / Total Short Ratio. It was one of the reasons we got Bullish on March 22 — a call we didn’t reverse until mid-April.

At the time, we wrote:

“Another sentiment indicator turns Bullish: the Specialist to Public Short Ratio (60 year chart), is at a levels which in the past have been associated with intermediate lows.

Specialists themselves may not be bearish, but often turn out later to be right because the public or the “crowd” was wrong. In declining markets, it’s the public who is doing the selling (and shorting) and the specialists who must buy to maintain an orderly market – even if they are not bullish at all.” (A variation of the NYSE Short interest is the NYSE Member Weekly Buy/Sell ratio.)

Now, the NYT has picked up on the same indicator:

“STOCKS are likely to rebound, at least for a while, if one obscure indicator, reflecting the investment patterns of an important Wall Street constituency, proves as accurate a forecasting tool as it has for the last 60 years.

The buy signal comes from the eight-week moving average of the weekly New York Stock Exchange specialist short-sale ratio. The ratio fell on July 23 to its lowest level, 22 percent, since at least 1943, when reliable records of the indicator were first compiled. That means specialist firms – brokers appointed by the exchange to maintain orderly markets in individual stocks, often by buying and selling shares themselves – accounted for about 22 percent of all N.Y.S.E shares sold short in the eight weeks through July 23. Selling short is a way to bet on declining prices, and the lower the ratio, the less short-selling the specialists are doing compared with other investors.

The weekly ratio can be calculated from the “round lot report,” found by entering those words in the search box of the exchange’s Web site, www.nyse.com (in the search results, look for a document titled “roundlots.html”). Divide specialist short sales (the second figure in the right column) by total short sales (the first figure in the same column) to obtain the ratio. The data issued by the exchange is usually about two weeks out of date.

When the ratio has fallen below 35 percent in the years since 1943, stocks have often rallied.”

While our bullish call 2 weeks ago was wrong — not early, as some have termed it, but flat out wrong — we continue to see signs of a bottoming process.

Note that this is not the one note song of a perma-bull; We made a very fortuitous Bearish call on January 22, 2004 before getting Bullish on March 22. We advised stepping aside in mid-April, only to get Bullish again on May 17, 2004. That long bias lasted until June 30. Finally, the call late July moved us back into the Bullish camp — while we did see a small bounce for a few days, that’s not what I was looking for.

So at this point, while cognizant of the trend and the selloff, I continue to see the signs of the bottoming process.

Click for larger graphic


Graphic courtesy of NYT

Silver lining: A friend commented to me: “The wronger this call is, the worse it is for the incumbent.” So if that’s your politics, you take some cold comfort in losing money. . .

Seeing Signs of a Stock Recovery in Some Obscure Tea Leaves
NYT, August 8, 2004

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  1. anon commented on Aug 8

    From the same article:

    “Ross Clark, an analyst at CIBC Wood Gundy in Vancouver. “However, with the advent of options and their acceptability in portfolios in the 1980’s, the parameters for the ratios at major tops and bottoms shifted. In the past decade the activity of hedge funds has produced an additional change in the character of the ratios.”

    Ergo; Ross is talking about the same phenomenon I’ve been trying to bait you into discussing. Today’s market isn’t your father’s market. The players, not to mention the mechanics, are simply different. So historical comparisons are less relevant. How less, and in what specifics, are interesting questions. Questions, perhaps, that you would be willing to discuss if I ever get around to sending you an email.

  2. Barry Ritholtz commented on Aug 8

    Am I reading you right?

    Are you actually saying that “its different this time?”

  3. Yasser commented on Aug 8

    It is different time [yes, I’ve just uttered the dreaded phrase.]

    The proliferation of hedge funds in the past few years – which have the ability to short, unlike most of their mutual fund brethren – has led to a *structural* downward move in the specialist short-interest ratio. Clearly, this is going to distort a historical analysis of the ratio unless some kind of adjustment is made.

  4. Barry Ritholtz commented on Aug 8

    OK, lets do a bit of Analysis of hedge funds —

    Why does the organization of investors (limited partnership) make such a difference? Haven’t speculators and traders been shorting stocks since Jesse Livermore and before?

    Why is the proliferation of funds make such a difference? Yes, its faster moving money — but plenty of hedgies have gone belly up.

    Whats the difference between Livermore and XYZ Capital Partners?

  5. Yasser commented on Aug 9

    Short-selling was a lot less common back then. Yes, limited partnerships existed, but not to the same extent as the hedge funds of today. The last decade has also witnessed the democratization of short-selling among retail investors, thanks in no small part to internet brokers, low commissions, and the stock market’s infiltration into pop culture – a phenomenon that has no historical parallel.

    To illustrate, the number of shares sold short in the 1929-1931 period constituted only a fraction of 1% of all shares outstanding, according to this article. Although I don’t have figures for the broad market, the current short interest on the QQQ is 45%, and on the SPY it is 20%. Are you willing to argue that short selling is more widespread now than it was in the teeth of the 1929 bear market, simply because people are exponentially more bearish these days? A more plausible explanation, in my view, is that structural factors account for the disparity. And if that’s the case, historical comparisons of the specialist ratio are unreliable.

  6. anon commented on Aug 9

    Yasser is making good points, but it isn’t just short selling and hedge funds that I am talking about. This is just a smaller example of a much, much larger phenomenon. As I originally stated, a week or two back, the players in the market today include a bunch of retailers who weren’t there before 1980, a large fortune owned by foreign investors, and the entire mutual fund industry. I’m not saying “it” is different this time. I am saying that the changes in participants has to have SOME effect on the market, so historical comparisons in ANY context are suspect. What that effect is, and how it should be accounted for when making historical comparisons, I haven’t quite figured out. But I suspect whoever figures it out first will make Soros-level money before they are through exploiting it. So, yes, I would like to discuss it.

  7. dimeo tane commented on Oct 9

    The IBD reports the NYSE Specialist Short Sales as making a 5 year high on Jun 9 2006 at “7.84” this caught my attention and I ended up here on my google search. It’s a different number however than the ratio described here in percent. Curious.

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