Short Interest Spike Presages Furious Sell-Off and Rally

For nimble traders only:  The last time the New York Stock Exchange short interest ratio broke below a key trendline, the U.S. equity market had a short and sharp selloff — one that was later followed by a major upside blow-off

The gray area on the chart is SPX; Blue line is NYSE short interest:

  click for larger chart

Source: Michael
, Rabo Securities USA


On the basis of monthly short interest data for the period ending October 14th (released yesterday by the NYSE) and average daily volume for the first two weeks of the month, the most recent SI reported works out to approximately 4.74 days.

That is the lowest level since January 2004. This places a measure below a major uptrend dating back to the September 2001 lows.

asks: "Time for deja vu all over again?"

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What's been said:

Discussions found on the web:
  1. D.Wallener commented on Oct 21

    Bogus trendlines. The original trendlines were, in both cases, already broken on the third spike downwards.

    Curvefitting 101.

  2. Allen commented on Oct 21

    I really don’t see the significance here.

    One, this is a single data point.

    Two, its hard to discern from the chart whether spikes down in the data, although not “trend breaking”, have any correlation to the S&P.

    As far as the “why”, is it because the latest rally from the spike down is inherently short covering and subsequently given up very fast?

  3. Sean-Paul commented on Oct 21

    I’m with Allen here. I think the chart is interesting, but I also think you are comparing apples to, uh, pomegranites?

  4. Jordan commented on Oct 21

    Rising short interest signals pessemism which is bullish. Wouldnt it be bearish if short interest starts declining. It seems to me the trend of the data is a signal and not a correlation with the trend of the market.

  5. jojo commented on Oct 22

    I voted for Bush twice and under his great stewardship the economy is in great shape…

  6. Allen commented on Oct 22

    Is that sarcasm, or are you serious?

  7. Sean-Paul commented on Oct 22

    I reckon it doesn’t much matter if it is sarcasm or not. Either way it’s hysterical!

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