Short Interest (Again) Precludes Correction

No wonder China’s 4.5% correction had so little impact here: There are a record number of bearish bets made on the NYSE.

We had mentioned back in October that the then record-setting short interest on the Nasdaq was precluding a major correction from occurring.

Today, we see a similar record setting short selling having the same impact — only this time, it is on the NYSE instead. From this morning’s WSJ:

"Short-selling activity jumped to another record on the
New York Stock Exchange despite the tepid returns that such bearish
bets have garnered so far this year.

For the monthly period ended April 13, the number of
short-selling positions not yet closed out at the New York Stock
Exchange — so-called short interest — leapt 4.6% to 10,989,496,813
shares from 10,510,404,017 shares in mid-March.

Market-wide, the short ratio, or number of days’
average volume represented by the outstanding short positions at the
exchange, fell to 6.1 from 6.2."

Despite a myriad of potential pitfalls facing the market, as we have noted in the past, overly large short selling creates a bid beneath the market. When grateful shorts cover, they prevent any downside momentum from developing.

If part of your thesis is investing due to "variant perception" — the belief that you have figured out something the rest of the investment community hasn’t — then statistically speaking, the short side isn’t really the ideal place to be when short interest is at record highs.

At that point, shorting is more akin to consensus investing, going along with crowd. Even if you do so independently . . .   


Bearish Bets Hit a Record On the NYSE
Lackluster Returns Fail to Discourage; Positions Rise 4.6%
WSJ, April 20, 2007; Page B6

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  1. Scott commented on Apr 20

    Re the data, and this is coming from a memory shot through with holes right at the moment, but I’m thinking there was large short interest prior to one of the major bear markets–my guess is that it was 1929. If I’m right in that, then there’s the experiential diss of the theory. With regard to the logic, if it’s short covering that’s holding the market up, then what you’re telling me is that the shorts, having been ground to death in a bet that the market is overvalued and will fall, cover on a 30-40 basis point move. Sorry–unless we’re dealing with the dumbest group of shorts on record, that makes no sense. Is it possible that some longs are hedging their long positions with puts, and that when they feel the panic lifting, they sell the puts, creating some buying? Yeah. But not at the level we’ve seen recently. There’s certainly a bid under the market, but I just don’t see it resulting from all the negativity about the market. In point of fact, I don’t see all that much negativity about the market, and the mysterious manner in which the market lifts whenever it seems on the brink of falling does nothing to reinforce what little negatvity remains. Go to a bearish site like Fleckenstein’s, and read the readers’ comments, and there’s tons of capitulation and self-doubt.

  2. John commented on Apr 20

    Who exactly is so massively short, the big (“smart”) money or the little (“dumb”) money?

  3. Barry Ritholtz commented on Apr 20

    Thanks Scott —

    And I haven’t forgotten about expiry today either . . .

  4. Frankie commented on Apr 20

    The dumb money is short, while the COT (professionals) are now much longer. The most popular blogs post so much bearish spin, conspiracy theories, and negativity (about everything) — so who can blame them.

    The short side always “sounds” so much more cerebral. ;o))

  5. commented on Apr 20

    Opening Bell: 4.20.07

    Nacchio convicted on 19 of 42 counts (BusinessWeek) Just in case you missed it, yesterday evening jurors in the Joe Nacchio case came back with a guilty verdict on 19 of the 42 counts. That’s slightly less than half, but…

  6. Philippe commented on Apr 20

    When looking at the last numbers on CAC, market has been down slightly for two consecutive days on HIGH VOLUME 6/7 Billion euros which are volume of “distribution days” in April may last year, but the indices do not move so much at the closing, the market was going up with an average of 3 Billion euros a day.
    This is quantitative.

  7. super-anon commented on Apr 20

    If part of your thesis is investing due to “variant perception” — the belief that you have figured out something the rest of the investment community hasn’t — then statistically speaking, the short side isn’t really the ideal place to be when short interest is at record highs.

    That depends on what you short. I don’t hear anybody who shorted NEW, for example, griping about lack of returns…

  8. bigJIMMY commented on Apr 20

    The indexes are red hot and have been for over three years running. Total fed credit feeding this market daily. M3 is exploding. Why is the Fed flooding the world with dough? Ben is afraid that housing will damp the economy. Not on his watch he says. If greenspan could get out of any jam by expanding the money supply then Ben will do it too. Greenspan thought we were going into deflationary spiral(remember that?), so he flooded the world with dollars. Massage the inflation rate down with hedonic substituion and noone will know the difference. Has anyone noticed the price of eggs lately? But its not infaltionary because people are substituting beef(but isn’t beef going up too?)and the eggs are better because the chickins are getting more sunlight and eating better diets of soy instead of corn. hmmmmm. go figure.
    the take away…don’t fight the fed. Enjoy the expansion, but be ready to flip on a dime when the time comes. (hopefully though it wont come overnight in asia with no opportunity to exit. And stay away from one sided bearish blogs. the shorts may be correct ultimately, but by that time they will have nothing left to take advantage of the collapse.
    now, go and enjoy the day.

  9. KP commented on Apr 20

    The party doesn’t end until the consumer gets pinched enough by the quickly rising cost of living.

    What republicans can’t bear to concede is that they need the peons to survive, and when you depend on the bees for honey…you damn well better make sure that the bees are healthy.

  10. Winston Munn commented on Apr 20

    Goes to show that macroeconomics don’t matter….until they matter.

  11. Fred commented on Apr 20

    On, I see that the Short Interest Ratio for the NYSE (de-trended) is back to the (ubber bullish) levels of the Fall 2002. Draw your own conclusions. These readings (what people are DOING) as opposed to BS surveys are much more significant to me.

    A weekly breakout of the NDX (if it can do it today) will scare the shite out of this crowded trade.

  12. Harley Evans commented on Apr 20

    One has to remember that there has been record growth in long-short hedge fund strategies when looking at this data. Also many hedge funds that may not claim to be long -short do short the ETF’s that closely match their holdings to hedge some of their gains, especially those in the short cap sector. Another contibutor to short interest are the market makers on the exchanges that sell the puts to customers/hedge funds, etc – they too must short stock to hedge along with buying the calls to arb or manufacture those put sells. The data shows record levels of options/puts trading that continues to grow and will continue to add to these short interest numbers. This all adds to the short interest and does not point to a future level of short covering to push the market higher. It does reveal one of the many reasons why the market has not had what you might call a decent selloff in quite awhile. These positions (long -short) act like long gamma in options, providing buyers on dips and sellers on rallies. If you add the companies that are buying their own stocks in buybacks at record levels then there is always a bid under the market.

  13. daisycolorado commented on Apr 20

    Thank God for the bears, we on the long side of the market could not make it without you….

    Without uber bearish sites like this and the invaluable Noureil Roubini, this market would have rolled over long ago.

  14. REW commented on Apr 20

    Your post made me go back and re-read your post on variant perception. It was even better the second time around. Very good, big picture, non-technical look at trading psycology and strategy.

    PS – I think there is a bad link to that VP post in your post above.


    BR Fixed it (Thanks!)

  15. michael schumacher commented on Apr 20

    Another day….another record high.

    too bad the dollar is almost at a 15 year low, it is at a two year low vs. euro.

    But keep that market up,up,up.

    I agree with Barry….options expiry is just yet another excuse for the juicing to continue.

    perma-bulls: please provide an arguement as to why the market should be at an all time high……..every day. Good luck finding anything other than commentary.


  16. Fred commented on Apr 20

    Keep bashing our country and our currency Micheal…please!

  17. madlibs commented on Apr 20

    You have to understand the dynamics of long/short hedge funds. I have many friends who are in their souls long only managers, but in order to charge hedge fund fees, they have to “hedge”. True story, a friend of mine is marketing his fund to investors, and someone asks, well how do you hedge? He says, by buying stocks cheap enough that I don’t have risk of permanent capital loss. That investor passed. Next time my friend was asked the question he replied, “with tactical shorts of indexes against our long positions”. That investor gave him millions. You have many many hedge funds that are blindly shorting indexes or supposed “gimme shorts” so that when they report to investors they can say “I’m 150% long, 75% short, and net 75% exposed”.

    As to shorting NEW, which a commenter mentioned above, unless you shorted it in the last few months, it was one hell of a painful ride. It cost neg 20 to borrow, was paying a 20%+ dividend and any gains you make are taxed short term. If you held the position for one year, you made less than 30% even though the stock went basically to 0.

  18. REW commented on Apr 20

    BR et al,
    Anyone see the Bridgewater note and chart showing hedge fund leverage at highest level since LTCM?
    AllAboutAlpha has a post on it, including some perspective about that level. Level is high because assets are so high. Leverage ratio is about 200%, back to where is was for most of the 1990s.

  19. Philippe commented on Apr 20

    Add to the “hand made” collars and butterflies all the structured products, which are using derivatives and confusion may arise when trying to differentiate naked put and naked long.
    What is not confusing is the difference between unrealised profits and profits.

  20. michael schumacher commented on Apr 20


    kindly fuck off as I’ve never bashed our country or currency.


  21. Eric commented on Apr 20

    Just wondering aloud whether the short-ETF offerings, like SDS, QID, TWM, etc. are changing the nature of “short interest”.

  22. fat mary commented on Apr 20


    you seem to have alot of anger where you shouldn’t. i think you should talk to someone about this.

  23. michael schumacher commented on Apr 20

    If by making a factual statement about where the dollar is relative to historical data points is “bashing our currency” then I feel so very sorry for you and your fake flag-waving.

    Grow up…


  24. Fred commented on Apr 20

    Eric — you hit on something there. PM’s used to use the Rydex Funds and the Rydex Ratio to determine short sentiment. It stopped being really effective, just as these inverse ETF’s came around. These ETF’s have become the “hedge of choice” as they’re liquid and offer intra-day pricing for hedging. Just look at the volume since March to see where chips are being placed.

  25. erik commented on Apr 20

    mommy it hurts. make it stop.

    what’s left for the rational investor?

  26. Fred commented on Apr 20

    “what’s left for the rational investor?”

    Try buying quality stocks that are trading at a PEG of 1.

    There are plenty to choose from!

  27. erik commented on Apr 20

    speaking of peg, wtf is going on in utility land. PSEG (peg) at 90? with a PE of 30? where to turn when even the utilities are the most overvalued sector of the market.

  28. km4 commented on Apr 20

    A Crude Awakening / The Oil Crash
    – A very informative film
    – Highly recommended
    – Pay attention to
    – And everything will be fine ;)

  29. Fred commented on Apr 20

    Perfect example…PEG had ’06 EPS of $2.93…’07 estimate is $5.15. That’s 75% growth….that’s a PEG of .4

  30. LAWMAN commented on Apr 20

    MS must have been short the market today.

    Seriously, MS, as I said before…is the market rational or irrational? If it were rational, it would not be looking at 13K today.

    At this point, the trend is my friend. I’d rather be irrational and making money, than rational and miserable.

  31. tjofpa commented on Apr 20

    And not to bash the $ or the country, but if u plan on going long from here, u’re stock better have some Internat sales and earnings.

  32. michael schumacher commented on Apr 20

    Ah yes….totally expected from you lawman

    You seem to know everything after the fact.

    Still waiting for your arguements. Or was that just too hard for all of you to come up with.

    Are you going to enrich us with yet another story of your portfolio?

    have fun while this none of you seem to have any clue as to why…only that you’re all profitting…..sure you are…


  33. Mousefinger commented on Apr 20

    Profitable traders don’t look for reason why a market is up or down. They trade what they see. Unprofitable traders focus too much on why a market moves. As long as the market is above its 200-MA, I’ll trade long. When it begins to put in a trend below the 200-MA, I’ll look to the short side.

    Wash, rinse, repeat.
    The Most Dangerous Word in the Trader’s Vocabulary

    “I can tell you this: I became a better trader when I started focusing on what the majority of stocks were doing rather than on what I thought the market should do.” – Brett Steenbarger

  34. michael schumacher commented on Apr 20


    last time I checked this was’nt a stock pickers blog it was a commentary based blog. So you must assume that anyone that has a different opinion than what the daily market mechanics show is just plain losing…

    Sorry hate to break it to you, and others as you seem to wrongly assume that just because I post things you don’t like to hear I MUST be short everything.

    I also have a bridge I can sell you……you can put it on the swamp you bought with all of the “profits” you’ve made today.


  35. LAWMAN commented on Apr 20

    MS: In general, I am a market bear. I have been a bear for about 2 years now, waiting for housing to take its toll on the market. Last year I made bearish investments and lagged the market for my decision.

    In your haste to be a jerk, you keep missing the point: I have no argument in support of the rising market. At this point, I don’t care, because I do not think that the market is acting rationally. But the woe-is-me mentality that infects some of the posters here gets mighty old.

    I do intend to “have fun while it lasts”…that is the whole point, isn’t it? To make money on the market? Or is the point to whine everyday about how the market is being irrational and these gains are really fake when you compare them to the euro/gold/etc./etc.

  36. michael schumacher commented on Apr 20

    talk about missing the point!…you’ve excelled at that already.


  37. Red Pill commented on Apr 20

    “What republicans can’t bear to concede is that they need the peons to survive, and when you depend on the bees for honey…you damn well better make sure that the bees are healthy.”

    This maybe a more painfully apt anaolgy than you think. Have you heard about “colony collapse disorder?” We are losing large percentages of our bee colonies. They just disappear. There is beginning to be problems with pollinating certain crops in California. I heard on the BBC it is happening in Britain too. We need bees for more than honey.

  38. LAWMAN commented on Apr 20

    LOL @ MS.

    Go ahead…I’ll give you the last word.

  39. angryinch commented on Apr 20


    Who needs Michael to “bash” the U.S. and its currency? The rest of the world is doing it for us: U.S. stocks and the U.S. Dinar have been just about the world’s worst-performing market and currency for the past five years. Check the charts.

  40. Mike commented on Apr 20

    Another bid under the market is all the M&A activity. With all that liquidity out there, a stock you just shorted could pop up 30% in an instant.

    Just out of curiosity, I’d like to see a graph similar to the one Barry posted thursday (Dow of ’87 vs ’07) but for short interest. Is the short interest tracking as well?

  41. patski commented on Apr 20

    Quick, someone tell Dougie Kass….

  42. ManhattanGuy commented on Apr 20

    Bears are getting killed by this market – Kudlow


  43. Winston Munn commented on Apr 20

    Eureka! Now I get it. What is it alcoholics call this – a moment of clarity?

    Before the opening, the BLS reports improved job growth – permabull watches the market and low and behold it goes up the same day as the announcement. Permabull thinks to himself, aha, there is correlation between employment and stock market prices.

    Next day before the opening, news is released that California mortgage foreclosures have risen 47%. Permabull watches the market and low and behold, the market is up again, although California regional banks and subprimes take a beating. Permabull thinks to himself, aha, foreclosures don’t matter.

    The next day earnings releases show many upside surprises from previoulsy downward revised estimates, and although the manufacurers of durable goods stocks decline, but the market is up. Permabull thinks to himself, aha, earnings suprises matter.

    The next day new housing starts are announced slightly better than expected and slightly better than the previous months but still down 14% YOY. Permabull watches the market and low and behold the market goes up, although Lowe and Home Depot decline. Permabull thinks to himself, aha, month-to-month new home starts matter.

    The next day an announcement is made that another sub-prime lender has gone out of business, bringing the total to date this year to 60. Permabull watches the market, and low and behold it is up, although subprime lenders are hammered and the financial sector weakens, especially those institutions with exposure to Alt-A loans. Permabull thinks to himself, aha, subprime is contained and doesn’t matter.

    The next day, retail sales are reported as up 0.4%, just as forecast, although results were mixed with high end retailers up more than 1.2% while the overall results were down slightly from 0.6% the previous year. Permabull watches the market and low and behold its up again, only this time up quite strongly.
    Permabull thinks to himself, aha, consumer spending is all that matters.

    Six months later, armed with unsurpassed knowledge of market moving events, permabull is totally leveraged, having refinanced his house to extract the equity, maxed out all of his credit cards with cash advances, emptied out his 401K, savings account, and checking account in order to open a margin account at E.F. Hutton, where he is 100% invested in low peg, modest P/E, non-dividend paying growth stocks.

    Over the next few days, the BLS announces a substantial increase in initial jobless claims, a report is issued that to forestall future foreclosure risk and to protect the integrity of the banking industry, only those with a FICA score or 820 can obtain a mortgage without a 20% cash down payment, earnings are released and although there were few upside surprises, almost all had hit their third downward revision of the quarter,and a full 40% had revised guidance downwards, new home starts are down 0.8% from the previous month and down 22% YOY, mortgage lenders are not receiving bids for their Alt-A mortgages or any income non-verified loan regardless of FICA score, and finally the crushing news that retail spending decline 1.5% from the previous months and 4% YOY.

    The markets are down 1500 points by now, and show no signs of gaining strength soon.

    WTF? thinks the permabull. How did this happen? The phone rings and he picks it up. It’s his broker with his margin call.

    These Bullishness=patriotism types must be the same group who still believe Saddam was buying “yellowcake” nuclear fuel from Nigeria – which explains the patriotic zeal shown when anyone questions the status quo and brings to light a point of fact that might actually cause an unpatriotic decline in market values.

    Geez, people, lighten up. This is just about business and money. Freedom to dissent and express an opposite opinion is America.

  44. Si commented on Apr 20

    Nice one Winston.

    OK I’m gonna have to fess up to you bulls, I’m only about 10% long this market.
    Do I feel like a fool, er yeah……ahhh absolution.

  45. MikeW commented on Apr 21


    Very interesting. What would be really interesting is if you or another market historian could dig up the figures for short interest in the NASDAQ, circa, say,
    right now minus 7 years. There must have
    been bears back then. I myself paid them
    no mind, and paid the price for it.

  46. Don commented on Apr 22

    You may have already noticed it, but the WSJ has posted a correction to the story that you referenced:

    “The New York Stock Exchange short-interest ratio jumped to 7.4 in April from 6.1 in March. This article incorrectly stated that the short ratio fell to 6.1 from 6.2.”

  47. joe beamer commented on Apr 24

    Bush appointees at the SEC, “let the naked shorts thru”.

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