Short Selling Surges to Record

The WSJ reports:

"Short-selling activity jumped to a record at the New York Stock Exchange during a reporting period in which U.S. stocks pulled back broadly amid fears of higher interest rates and weakness in overseas financial markets.

For the month ended June 15, the number of short-selling positions not closed out — known as short interest — rose 5.5% at the Big Board to 9,087,309,158 from 8,613,110,732 in mid-May.

Marketwide, the short ratio, or the number of shares that investors have sold short divided by average daily volume, fell to 4.9 from 5.0."

High short selling can be a contrary indicator, depending upon who does it. When its the general public, it is typically a good fear indicator. At extremes, its a buy signal. Rallies can often get started with short covering, and this can lead to fierce price spikes as shorts scramble to cover (like last Thursday’s 200 pointer).

However, short-selling by "smart money"  — e.g., NYSE specialists, market makers, etc. — is often a sell signal. When too much of the public clamors fopr stocks regardless of price, the professional selling can often mark a top. These often come form the Commitment of Trader’s reports (more on the CoT soon).

The short selling reported last week is the total short position of the exchange — that sets the stage for a modest advance. As these shorts cover, its fuel for the market to grind higher.


UPDATE: June 22, 2006 4:57pm

Birinyi Associates notes the percentage of NYSE Short Sales of the smart money and the dumb money:

Short Shares as Percent of Total



Short Selling Surges to Record On the Big Board
Softness in Markets Abroad And Interest-Rate Concerns Drive Dimmer View of Stocks
WSJ, June 22, 2006

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  1. john commented on Jun 22

    Just from the number of blogs I read/glance through every day I see that the number of retail short sellers is increasing. Somewhere, someone must have written a book = Shorting for Fun and Profit – because all of a sudden there seems to be a lot of folks out there attempting to game a profit by shorting. One hopes they don’t get too hurt. Wondering if the lesson of 2000 was – Learn To Short.

    Noticed that Profunds has 7 new inverse ETFs just on the market yesterday. I like the idea since I use their products anyway but I’m wondering if these will add to the short pressure?

  2. vf commented on Jun 22

    not a surprise in front of the June expiry and that rally last Thurs looked like a classic short squeeze. it looks to me like the only decent bid since this sell off started has been the shorts. during that huge reversal day at the end of May when we were down 250 and rallied to unch the IWM’s volume turned over the entire float.

  3. Mark commented on Jun 22

    A little OT, we got an LEI report that was a bit suckier than we expected, the $USD is on a rocket ship, PMs are down as are bonds and the markets. Interesting day shaping up here.

  4. darland commented on Jun 22

    Anybody have a graph of short interest for historical context? NYSE wants $ for it and I cannot find this on Factset. Thanks.

  5. HT commented on Jun 22

    So– The updated data just provided [thanks BR] says the ‘smart money’ isnt going short–but the ‘dumb money’ retail side. Therefore, the contrarian logic is, ‘this is a buying opportunity”. Barry–what say you? This flies in the face of your long term call of [huge] weakness in second half [which I agree with incidently]–the disturbing thing is–can’t bame this on a random number [like the last bullish housing starts # etc]–that chart of ‘smart money’ short selling has been going down for years steadily.So saying, its a tradable bounce isnt supported by this [admitedly one] piece of data.


  6. whipsaw commented on Jun 22

    I am confused- the way I read these charts, they go back to 2002 and depict a downward trend by smart money and an upward trend by dumb money since last July. Ok, but the current percentages look to account for about 70% of short sales, so who is responsible for the other 30%- mediocre money? More to the point, where did smart money go since this past February when it started scaling out of long positions? It’s hard for me to picture those guys just standing aside.

  7. HT commented on Jun 22

    Good pick up whipsaw– so maybe the other 30% are ‘widows and orphans’ or perhaps…. hedge funds? [due to the lower reporting restrictions etc?]

    question than is, 1. which camp are they in and 2. are they ‘smart’ or ‘dumb’ money– …..

  8. HT commented on Jun 22

    Oh last comment in terms of where the ‘smart’ money may have gone– look at the chart of weekly in flows of cash into money markets that is posted weekly in the WSJ– its a substantial slope upward–so, maybe your answer.

  9. Max commented on Jun 22

    Can anyone comment on the following article stating the COT report has bit the dust as a trading tool.
    I’m far from a pro and would appreciate a comment from one of the regular bloggers that are more in touch with this.

  10. whipsaw commented on Jun 22

    per Max:

    “Can anyone comment on the following article stating the COT report has bit the dust as a trading tool.
    I’m far from a pro and would appreciate a comment from one of the regular bloggers that are more in touch with this.”

    I tend to ignore things on goldbug sites since those guys are so, erm, special, but this is very interesting and useful if half of it is true. I can’t offer a meaningful opinion otherwise, but appreciate you pointing it out.

  11. Bryan commented on Jun 22

    Can we have a daily review of this chart? If not weekly. Its a good indicator of when rallies will come.

  12. toddZ commented on Jun 23

    It is my understanding that specialists have to sell short on the open when there are too many bids and not enough sellers in order to maintain an orderly market.

    Plus, it doesn’t look like it would have been too profitable to be short in 2003, yet specialist were at 30-40% compared to today’s 10%…. what gives?

    Everyone is way to obsessed with “contrary indicators” to the point that they might be useless. Increased short selling is inevitable in a choppy go nowhere market, and it doesn’t indicate that the market is going higher OR lower…

  13. BB commented on Jun 23

    I also wonder who made the most money shorting when the market pullback finally arrived – the so-called “smart money” who was the least short that they’d been in the last 3 years or the “dumb money” who got more short into the rampup throughout last fall?

  14. bt commented on Jun 24

    Two observations. First, the short interest went up by a half billion shares between May 15 and June 15. Half a billion share increment is nothing. It can be covered in one day casuing a moderate sized rally (perhaps like the one we had last Wednesday). Second, why do people make such a big deal about short sales and not enough about margin buying? I keep hearing about how shorts have to eventually cover so markets will go up when short selling is high. What about the other side of the picture? Don’t all users of margin eventually have to sell to pay back the margin loan? Aren’t rising interest rates working against margin buyers? They not only have to sell their margined stock when stocks go down (thus pressuring their margined accounts disproportionately), but rising interest rates makes it harder for them to justify taking new margin loans.

  15. Miki commented on Jul 20

    I agree with you Bryan that short selling is not a good indicator of an up or down market, but for a different reason. Its important to remember that short selling is no longer used the same way it was 20 years ago (profiting from the market going down). Today we have massive hedge funds that simply short in order finance another position that they think will outperform the shorted stock: For example, if I short Microsoft and use that money to buy Apple, I don’t care whether Microsoft or Apple go up OR down,….both positions balance each other out, and market performance has NO effect on my position. As long as Apple does better than Microsoft (Apple goes up more or down less), I make money, and even better, I didn’t even have take cash out of my pocket. This is a simple strategy many hedge funds, and even individuals are using today, and has no implication as to whether they “think” the market is going up or down since market movement is irrelevant in this position. If one could distinguish what percentage of short sales are pure short plays, that would be more indicative of what the market is thinking, but I have no idea how you would go about doing that…

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