Record Short Interest Prevents Correction

If you are at all curious as to why the market keeps powering higher, you can look at several factors: Falling energy prices, lowered interest rates, increased futures buying are likely culprits we have identified as impacting intermediate term trading.

But don’t overlook THE key short term driver for why the market has a "preternatural bid" beneath it:  Record Shortselling.

According to today’s WSJ, "Short-selling activity rose to a new record on the technology-stock-heavy Nasdaq Stock Market, outpacing the rise in bearish bets in other parts of the market."

"For the monthly period ended Oct. 13, the number of short-selling positions not yet closed out at Nasdaq — so-called short interest — rose 0.8% to 7,414,701,519 shares from 7,353,774,333 shares in mid-September.

The rise outpaced the 0.1% increase in short interest at the neighboring New York Stock Exchange, which as previously reported also saw its total short interest hit a record in the October period.

Despite a market run-up that has pushed the Dow Jones Industrial Average to records this month, many short-sellers have hung onto their bets, which lose value during such upturns…

The Nasdaq short ratio, or number of days’ average volume represented
by the outstanding short positions at the exchange, fell to 3.9 from
4.4 last month."

The record short selling manifests itself in several ways in actual trading.

From a Sentiment perspective, it means that we have not achieved a giddy excess bullishness required for a correction. 

And, as long as short positions are at all time records, its hard for any correction to develop. Any downside momentum is simply halted by covering. And exasperating things, each move upwards becomes exaggerated as shorts stop losses get triggered and they buy in.

Of course, this can change in a hurry: words or deeds from the Fed, oil prices, geopolitics, even an errant comment from Treasury Secy can start a cascading chain reaction.   

Consider this: if the rabid anti-shorting Sith Lord crew get their way, they will have succeeded in removing a key floor to markets, and source of buying when we correct.

Despite my Macro-environment Bearishness, I have been telling clients that it is still too early to short, given the technical picture. Short interest only adds to that.


UPDATE: October 25, 2006 7:28am

For a timely example of how short interest can impact a stock, Marketwatch’s Bambi Francisco notes that:

Amazon (AMZN) shares shot up 11% in after-hours action, partly on relief the retailer didn’t blow its quarter, and to a great extent because those who sold Amazon short prior to the results had to run for cover. Amazon’s short interest stands at the highest level in at least a year. According to the Nasdaq, 43.6 million shares are held in a short position.

That’s a perfect example of how a crowded short position places a floor under a stock or market . . .


Bearish Bets On the Nasdaq Reach a Record
Increase Reflects Concerns Of Lingering Weakness
Despite Recent Stock Rally
WSJ, October 25, 2006; Page C11

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  1. Adam Schierholz commented on Oct 25

    Doesn’t this also mean we have the potential to go much higher if we have another leg up and these shorts get scared out and cover fueling us even higher?

  2. JGarcia commented on Oct 25


    Absolutely correct. Additionally, consider the fact that most hedge funds (a majority of trading these days) are underperforming, and risk draw downs. This should create even more demand on any pullbacks. They’ll need to deploy size quickly so I’ve been betting on the largest cap (ETF components) that should benefit from these trends.

    The short interest is the clearest picture possible of the true market sentiment…total skepticism. The persistantly high put call ratio gives further color.

    Another factor is the massive covered call writing done in the new closed end income funds. The rollouts are even more fuel.

    This is a tough reality for the perma bears (and I’m not suggesting Barry is one).

  3. enrico commented on Oct 25

    Barry, a few weeks ago John Succo wrote for Minyanville an article i’m sure you’ve heard about.
    He was saying that short interest doesnt matter anymore.
    Here’s an abstract:

    “Traders, investors, and the milkman keep telling me short interest is so high stocks have to go up. “All those shorts will get killed! They will be forced to cover!”

    Short interest is now absolutely meaningless. The derivatives market, which is ten times the size as the cash markets, have made it so.

    Never in the history of man has so many call options been sold on stocks. This causes large funds like mine to buy those calls and short stock. I WILL NEVER COVER THAT SHORT STOCK. As the stock rises, I will short more and more until I am one up against the calls I own. At or near expiration I will then exercise those calls and my position will be gone. NO MORE SHORT INTEREST.”

    I’m not sure how can he make money out of such a strategy, but that’s his take on the matter.

  4. blam commented on Oct 25

    If everyone is selling, who’s buying ?

    There is a certain logic to the short covering hypothesis, but who’s buying to create the short squeeze ? Shorting is selling. If the selling has been massive, why hasn’t the market even dipped under the weight of all that “short selling”?

    Somebody has been buying with certainty that this market will not crash. The bid has been massive in the face of an economy that is rapidly slowing. All this for a 1/4 point drop or unchanged from the Fed.

    This rally is stinking up the place with manipulation.

  5. Leisa commented on Oct 25

    Regarding Succo’s comment….I’m not experienced in shorting stocks, but aren’t there instances where your broker can no longer grant you the borrowed shares and you have to buy them? So perhaps a large fund may not have to cover, but minions, such as ourselves, may have to at a very unfavorable price, any call options notwithstanding.

  6. jmf commented on Oct 25

    hello from germany,

    i think barry is right.

    but i aslo think that the latest market action can not only be explained from shortcovering.

    the magnitude of the runup is to severe.

    no matter how you look at this. the fundamenatls matter. but it looks like they will not play out until 2007

  7. JAM commented on Oct 25

    thats a lie. something nobody ever talks about in short interest is the toal short interest in realtion to shares outstanding. as companys split there stocks there short interest doubles and thats why total volume of short itnerest will always rise period. PUT SHORT INTEREST AS A % OF TOTAL SHARES OUTSTANDING IS NO HIGHER THAN ANY OTHER TIME IN HISTORY. AN EXAMPLE IS MSFT. WHEN THEY HAD 5 BILLION SHARES AND SPLIT 2-1 AND THERE SHORT INTEREST PRE SPLIT WAS 40 MILLION ALL OF A SUDDEN IT GOES TO 80 MILLION. DO THAT ON 40 SPLITS AMONTH AND YOU SEE HOW TOTAL SHORT INTEREST WILL ALWAYS RISE

  8. Jack commented on Oct 25

    “From a Sentiment perspective, it means that we have not achieved a giddy excess bullishness required for a correction. ”

    I think that phrase is the essence of this market, right now. The question is, how high can this market go, before we reach that point.

  9. Chris commented on Oct 25

    So we need extreme over the top 100% bulls giddiness to have a 1% pullback (which we havent had in over 3 months) ??? Thats just ridiculous.

  10. Albert Ruback commented on Oct 25

    Short interest has declined in its importance. SIR has been “high” (categorized by Ned Davis as above 2.2) since 2Q ’01 and the market has done nothing net, net since then. How about considering the VIX which has been cut in half over the same time? There is too much optimism in the market.

  11. james commented on Oct 25

    Succo’s column was about volatility trading – funds like his have taken on a huge role in supplying liquidity to the markets that the B/D’s are not has active any more given penny trading in stocks and now options. When his fund is long gamma, it profits from prices going up OR down. When a market goes higher, they short stocks to re-align their exposure and take profits.

    Another interesting article I read was regarding the fact that short interest levels have been VERY high at some very big market peaks – of the 1929 and 1987 variety. As big as the relative short interest is, it is still just a mouse compared to the elephant of the overall markets. To believe that short interest could be a primary driver is like saying that the mouse is making the elephant dance. Perhaps that can be true in cartoons, but this is no cartoon.

  12. Steve Waldman commented on Oct 25

    I think it’s important to distinguish between 3 kinds of shorts: 1) traders making short-term bets who will cover to stop losses; 2) hedgers, shorting to partially offset their positions in a related security; and 3) “sell and hold” shorts who are making longer-term bets and intend to ride spikes in prices without covering. The short-covering rallies are driven by the first category of shorts. But short interest includes categories 2 and 3 as well, and I’d bet that both categories are growing in relative significance.

  13. ari5000 commented on Oct 25

    But how many hedge funds are short?

    There didn’t used to be an industry that controlled $1.3 trillion.

    Maybe all this short interest is why the $VIX is so low… there’s little chance of a crash now.

    Then again… maybe not.

  14. Scott Frew commented on Oct 25


    Certainly in theory you’re more or less right. But theory and practice don’t always coincide. Very high and building levels of short interest in September and October 1929. As I recall, that was not a great period for equities. I don’t have time to cite chapter and verse at the moment, but if I get to it later I’ll give you the specifics, or if somebody else has them readily at hand, perhaps they could.

  15. bob commented on Oct 25

    I think short interest is very important for some particular retail stocks, like Amazon and other internets, where lots of “stupid” money are crowded.

    The short interest on not-so-sexy stocks, like Caterpillar, is meaningless for the reasons stated in messages above.

    But yes, to some extend short interest should cap volatility. Don’t expect Dow to crash by more than 100 points in any single day.

    If the crash is coming, a lot of regrouping of smart money will have to be made in preparations. Maybe we will notice some unusual activity. Maybe not.

  16. BDG123 commented on Oct 25

    The short interest in 1929 was courtesy of your favorite Wall Street professional who was trading against their clients, the American investor, in the markets. Today, guess what? We have the same situation unfolding. Merrill, JPM, GS, LEH, C and others now have massive trading groups profiting from their client’s demise. Isn’t life grand? lol.

    Barry’s statements are quite accurate. He didn’t say it was entirely short interest causing the rally. But, if anyone has any question at all to the validity, all you need to do is get a list of the stocks with a high short interest and see how some have gone meteoric. Wal-mart’s stupid move a few days ago on the third highest volume in the last twenty year was one such case. A day they announced a cessation to growth and less than stellar business comments. Think all of that volume and a 5% single day rise in a $200 billion market cap stock was because of corporate announcement of cutting back on growth and capex? No, it was because record short interest had accrued.

    Succo is wrong with a twist. That twist is the majority of short sellers do not hedge their bets.

  17. jj commented on Oct 25

    AMAT’s short interest rose by 123Million shares this month to 161Million …. 11+ % of their outstanding shares ……. want to see a great short-squeeze ????….. they report #’s in 3 weeks

  18. my1ambition commented on Oct 25

    Amazing that the amount of Debt (shorts on margin) speculators willing to take on in order to make a dime is unbelievable! It think we have a new speculator in the hyped crowds – “The Hedge Investor”!

    Blam said: “Somebody has been buying with certainty that this market will not crash”. Exactly…”BUT THE SHIP CAN’T SINK!”

    Albert’s point on the VIX is head on. BDG123: interesting point.


  19. jj commented on Oct 25

    Dow briefly passed the 3rd Standard Deviation above the 200-Day m.a. . for the first time since March of ’98 , and only the 6th time since 1990

    bit overstretched !!! sploink

  20. Tom Carroll commented on Oct 25

    Can someone explain this to me: “Any downside momentum is halted by covering.” Seems to me that traders wouldn’t be covering when the market moves their way. I understand how short covering in a rising market can increase upside momentum, but don’t understand why downside momentum would cause shorts to cover and thereby create a floor.

  21. S commented on Oct 25

    Convert arb guys are another reason why short interest is so high. Like Succo said, as stocks rise the convert arb guys have to adjust their hedges so they short even more in rising markets….they’re not frantically trying to cover creating buying pressure.

    The strategy had a couple of poor years so convert issuance really slowed down, but my guess is there’s still over $500 billion of seasoned converts outstanding. The convert arb guys represent a meaningful percent of the total shares sold short.

  22. charts commented on Oct 25

    Another time the Naz had record short-selling. March 2000? as one person pointed out, the volume of short selling indeed, tends to increase over time.

    i think you mean to say the short interest to long interest ratio…that is definitely a record.

    but to say the market can’t go down with the ratio so extreme is ludicrous.

    the ratio was at a 5 year extreme before the 20% S+P meltdown in 1998.

    and the NYSE short interest ratio got really extreme, on a relative basis, prior to the 1990 recessionary tumble too.

    shortselling is “THE key short term driver”? barry, i expect better analysis.

  23. BDG123 commented on Oct 25

    Nice comment jj. The Dow and OEX are hanging out there on a cliff with no support close by. In addition, the price movement continues to narrow, ie ATR. We are going to get a correction regardless of the short interest. The only question is the size. This type of move is simply not sustainable and we’ve seen large short positions in the past as markets go down. When there are no buyers, it doesn’t matter how much short interest there is. And, it also matters who is shorting. And since the top 30 or so firms move the market, all they need to do is take a buying nap or start dumping.

  24. wcw commented on Oct 25

    Data, data, data.

    I haven’t done the NASDAQ chart, though perhaps I shall today, but I did look at the NYSE short interest ratio going back to 1931. What you’ll see is a ranging indicator for a half century, followed twenty years headed straight up, followed by a big drop into the bubble market (can you blame ’em?), a rebound as it popped, and ranging (but volatile) numbers since.

    To my mind, short interest numbers effectively are useless as sentiment indicators. They are noisy, do not necessarily reflect actual bearish positions (take options hedgers, as above), and their “historic high” is thirty years in the making.

    Better is something like the ISEE, which measures only opening long options positions. That one I put here next to an interesting SEC comment letter about trading volumes. That one really does show progressively more bearish trading from last fall through late summer, though it is turning up lately.

    While Barry is wrong to pay attention to short interest numbers, he is right about the market. Look what the homebuilders did on yet another awful report: they’re rallying 2.5%, because *surely* the bottom is in now.

    I am going to have some cheap index puts going into GDP anyway, but only as much premium as I feel like losing over the weekend. This market wants to rally, and will until it absolutely has to face facts. GDP might be the wakeup for it, but probably won’t be. I can already hear the just-wait-for-Q4 cheerleading.

  25. bondguy commented on Oct 25

    Has anyone lookes at short interest for the NYSE Specialists? It seems to me that they would represent traders that are looking at the direction of stocks and not involves in any arb activity. Greats posts by everyone. Thanks.

  26. James C. commented on Oct 25

    “If you are at all curious as to why the market keeps powering higher, you can look at several factors: Falling energy prices, lowered interest rates, increased futures buying are likely culprits we have identified as impacting intermediate term trading.”

    Yes, but energy has been reversing course of late, especially after today’s DOE numbers. Oil and NG (especially) have moved up strongly.

    If this is sustainable the focus will be back on inflation and the impact of higher energy on the economy, and the markets will be reacting much as they did previously when energy spiked.

  27. Mark commented on Oct 25

    Better see Calculated Risk as to how the blog author caught the NAR fudging already bad figures. According to CR they mad an unannounced change in the seasonal adjustment oe else the figures would be much worse!

  28. Bruce Sherman commented on Oct 25


    How long can this phenomenon realistically persist?


  29. tjofpa commented on Oct 25

    …and of course they didn’t bother to seasonally adjust the inventory #’s because then they would have shown a gain rather than a decrease.

    Just can’t wait for this hawkish, get tough on inflation message from the grand pooh bah. (Wink Wink, Hardy Har har, LOL) Another meaningless, inane, Pavlovian excuse to push the mkts around just like the JOBS data.
    At 2:16;
    Team A: Buy the $
    Team B: Buy stocks
    Team C: Sell Gold and commodities

  30. Barry Ritholtz commented on Oct 25


    As Keynes said, longer than you can stay solvent for (if you are short)

  31. donna commented on Oct 25

    I think who’s buying is a very interesting question right now, indeed.

  32. Matt C. commented on Oct 25


    I’m an amateur, but I can’t help but think the continued rise in equities despite questionable fundamentals is partly caused by a simple abundance of capital in the market. Individual investors and institutional buyers alike have more money than they know what to do with, but need/demand high returns on that capital.

    Is that an overly simplistic view?

  33. babycondor commented on Oct 25

    Sometimes simple is better (eg. Occam’s Razor)

  34. Bruce Sherman commented on Oct 25


    As Keynes said, longer than you can stay solvent for (if you are short)

    Posted by: Barry Ritholtz | Oct 25, 2006 2:20:38 PM”

    Nope. I’m not short. I do have too much in cash, but I am not about to chase this market. Patience will, I hope, eventually pay off.


  35. whipsaw commented on Oct 25

    per Matt C.:
    “I’m an amateur, but I can’t help but think the continued rise in equities despite questionable fundamentals is partly caused by a simple abundance of capital in the market.”

    Absolutely correct, excess liquidity is driving a lot of this. We can argue about where that liquidity is coming from, but it’s there and largely accounts for the general compression of volatility as well as the expansion of p/e ratios (i.e., higher share prices). It took me a while to remember that you can’t fight this regardless of how crazy it may be in the face of a sliding economy. But I made a substantial tuition payment when I took Professor Market’s recent refresher course “Little Fish Must Swim Behind the Sharks, Never in Front.” :)

    As far as short interest goes, I suspect that most of it is not really directional but involves hedging of one kind or another. I understand Succo’s scheme up to a point- he is buying calls that are dirt cheap and then using short sales to hedge them on the assumption that long gamma will kick in and make his positions profitable once volatility picks up. What I don’t understand is why he doesn’t just do this with equally cheap puts instead of shorts to avoid unpleasant things like dividends, etc.? He could go delta neutral and presumably avoid using up margin. I am sure that there is a good answer that is tied to the fact that he is not a retail investor, but would be interested if any of you option mavens would care to explain?

    Finally, my guesstimate is that we have at least two more weeks of this semi-parabolic market to go. The reckoning will come in due course, but I am going to judge that strictly by the charts, not what should be happening based on common sense.

  36. muckdog commented on Oct 25

    Money market rates are over 5%. No reason to chase an extended market if one is in cash or underinvested. I sold much of my tech and semis back in September and yes, it is humbling to see cash just sitting there on the sidelines when it could be invested in the DOW. But I’ve been doing this long enough to keep excitement and emotion in check.

    Patience is not part of the Axis of Evil. Patience is an ally. (Coalition of the willing?)

  37. Ricardo commented on Oct 25

    Short-selling is only an INDICATOR, another piece of the puzzle. Also, capital DOES flow from various investments, are stocks the ONLY game in town?

  38. Movie Guy commented on Oct 26

    Interesting, Barry.

    Many thanks.

  39. Kevin_r commented on Oct 26

    Can someone explain this to me: “Any downside momentum is halted by covering.” Seems to me that traders wouldn’t be covering when the market moves their way. I understand how short covering in a rising market can increase upside momentum, but don’t understand why downside momentum would cause shorts to cover and thereby create a floor.

    Shorters have lost money lately. If there is a dip in the market, many would take the opportunity to bail out. If enough of them do that, it stops the dip.

  40. Tom commented on Nov 4

    This is all about supply and demand. It’s Economics 101.

    First, you have declining interest rates on the 10 year treasury bond. As rates drop, equities become more attractive on a relative basis. Second, you have sentiment (the masses) betting against equities. That’s reason enough to go long right there. Third, you have lesser supply in the marketplace. If you recall back in the late 1990s and early 2000, technology companies were printing shares to use as currency to buy other companies. Now nearly every deal is a cash deal. Why does that matter? Well, every time a deal is done, that’s one fewer company on the market – less supply. Fourth, look at the cash on corporate balance sheets. In addition to the plethora of cash deals recently, how many share buybacks have you seen? Major technology companies have announced plans to buy back as many as 25% of their shares. What happens when you reduce supply and demand picks up even a tiny bit? Explosion to the upside. Fifth, in a lower interest environment, corporate earnings become more valuable. Company shares are bid higher, resulting in significant multiple expansion. Finally, do you know where the NASDAQ was BEFORE the 85% rise in 1999 and the 25% rise in the first quarter of 2000? It was at 2193. We have appreciated a MASSIVE 140 points, or 6-7% IN THE AGGREGATE in 8 YEARS!!!!!!!!

    There are other factors as well, but this market has just begun to ascend. I’ve heard folks say we’ll never see NASDAQ 5000 again in our lifetime.

    It’s closer than you think. Look for major appreciation in equities over the course of the next 1-3 years.

    We are very bullish equities and have been since mid-August when the economic picture became clearer and we realized that for the first time in years, we have an accommodating Fed at hand.

  41. dimeo commented on Nov 5

    Great comments here! I too am massively in cash, missing out on the continuing bull run in the past month. I thought the market was getting overbought in September. However I am also not short. I look at this all time high short interest ratio and am thoroughly confused… most other ‘peaks’ in the short interest ratio in the past 5 years have been at the bottom of the trend, a new lower low or higher low. Here we are lately and the short interest is at a 5 year high and the market is also at a high. What’s going on? Somehow this classic indicator is ‘reversed’ or ‘inverted’. Either this time the predominant opinion among short sellers is correct and timely, or there is massive market manipulation. Perhaps not unrelated to the mid-term elections? Big bush bankers buying votes?

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