Relative Short Interest/Total Market Float

NYSE Short Selling rose to yet another high. For the monthly period ended May 15, short interest on the NYSE rose 7% from mid-April. Market-wide,
the short ratio, or the number of days’ average volume represented by
the outstanding short positions at the exchange, was unchanged at 7.4. (next NYSE short-interest report is June 22)

As we have noted on several occasions in the past, high short interest places a floor under the markets.

Perhaps a better way to look at short interest is by comparing the ratio of shares sold "short" versus the total shares outstanding.

Throughout the entire 1990s Bull run, the short interest relative to the total outstanding float was fairly flat. It wasn’t until 2000 that the actual float began to move higher as a percentage of total shares outstanding. The same phenomenon seems to be occurring since mid-2006.

click for larger chartShort_interest_relative_to_float_2

Bloomberg chart created in conjunction with Peter Bookvar of Miller Tabak


Its difficult to draw any firm conclusions about the forecasting acumen of this chart, given the lack a deep set of historical examples.

Additionally, given all of the M&A, some of this short interest is likely to be not actual shorting, but arbitrage activity. Then there are the derivatives, some of which may be creating short interest also.

Let’s just say this: large short interest creates a potential bid beneath markets, while rapidly rising Relative Short Interest/Total Float is potentially worrisome, especially when it occurs after the first market break (as in mid 2,000).

In other words, the Bears eventually get it right, but to have better odds of short positions being correct, it helps for there to be a major long term trend break to confirm the short sellers; that’s a major signal which is missing at present.


Bearish Bets Rise on NYSE
WSJ, May 22, 2007

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What's been said:

Discussions found on the web:
  1. theroxylandr commented on May 23

    There are $$$ trillions of derivatives, which makes it all a black box. You made few scratches on the BB surface with your post, but it’s shut down.

  2. sam commented on May 23

    CDO^2 & CDO^3 are infesting the market..todays’ data is unlike any in the past

  3. Steve Bowles commented on May 23

    With 10’s of billions, if not hundreds of billions of dollars now being run by merger arbitrage, pure spread and credit default swap box spread trading hedge funds, I am quite frankly surprised the short interest isnt significantly higher. This is an utterly meaningless number as it doesnt break down if something has been bought against it !

  4. Fred commented on May 23

    Interesting, value added comments Barry. I agree that derivitives and arbs might skew the picture.

    Another metric to follow is a combo of the Rydex Ratio and the Inverse ETFs, as well as the COT positioning.

    Interestingly the money flows have been very negative in the Inverse ETFs. This has my attention.

  5. Fred commented on May 23

    The Public Short ratio is actually flashing a warning sign (bearish)…Specialists as “sellers of the last resort”. One might question the “value” of Specialists as their clout is not what it used to be, but it’s also worth watching as well..

  6. TexasHippie commented on May 23

    The Public now seems to be pessimistic about the state of our union; Main Street has a fever and the only prescription is more cowbell, and other consumer goods. I don’t see the public as a reliable indicator this time because they may actually be more irrational than Wall Street, showing no concern for their own well being via personal savings levels, etc.

    On a separate note I’m intrigued by funds that specialize in M&A activity. They tend to be long on acquisition targets and short on the parent companies, which could account for the large short levels (different from bearish shorts as mentioned above). Can anyone explain why parent companies tend to dip after a takeover acquisition? Even if shareholders prefer a dividend to put that cash to good use, this M&A boom has been about easy money via liquidity. Lastly, with companies eager to saddle up with debt for M&A, why aren’t they doing the same with CapEx?

  7. Bob A commented on May 23

    There was some comment on this yesterday on Minyanville saying much of it is hedge funds buying cheap calls and shorting stock against them.

  8. TexasHippie commented on May 23

    BTW Barry, where did the Sell in May post go? I see it in my feed reader and in the “recent posts” link on the left, but it’s not on the front page or on the original link:

    Thanks for all you do!

    BR: Premature launch — its set for Friday morn (when I am beach bound!)

  9. TexasHippie commented on May 23

    Another question: for the momo nerds here, what happens if shorts “get greedy” allowing a drop to turn parabolic instead of covering their gains as the market falls? Why does short interest inherently create a “bid beneath the market”, as Barry describes, whereas long interest does not create a ceiling above the market?

    My only guess is that shorts simply less inclined to be irrationally exuberant during their significant gains for two reasons: they are “winning” while the overall mood is very negative, so there’s no positive feedback cycle caused by groupthink; and the shorts are presumably contrarian to begin with, which suggests that they distrust emotionally-driven trends in any direction.

    Any thoughts?

  10. grodge commented on May 23

    I understand the concept of high short interest creating a bid to the market, but the graph points out the opposite phenomenon.

    2001 and 2002 show a rising short-interest to shares ratio, but the market had two terrible years in returns.

    What gives? Am I missing something?

  11. S commented on May 23

    8000 hedge funds are pursuing risk arb, convert arb, statistical arb, capital strucutre arb, long/short, stub trading, spins, etc. Then consider the the “derivatives gone wild” of the past 10 years, mostly all of which are hedged by at least one of the counter-parties, and I’m pretty sure that attempting to interpret any kind of sentiment reading from short interest as a lost cause.

  12. michael schumacher commented on May 23

    Totally agree with S as none of it has mattered…until it does……

    I thought that Paulsen calling for the housing bottom is completely outside the scope of his range. Stick to printing the money and not deciding whether the cheap money-infused housing bubble created by your predecessors has completed the cycle.

    WTF is Paulsen doing even speaking about the housing problem? It’s bottomed?? Sure tell that to the folks who have had there homes for sale for over a year (priced rightly or wrongly).

    Paulsen speaking to the Chinese that’s all that was at work yesterday……


  13. Estragon commented on May 23

    TexasHippie – Another thought to toss into the mix is who is selling to whom, and when.

    In a major selloff, the first sellers are probably highly levered, momentum oriented (weak) longs, and momentum oriented shorts. If so, the pool of stock available for shorting (i.e. held in margin accounts) will decline. Stock will become more difficult and expensive to borrow, and the volitility will probably make hedging with options more costly as well.

  14. Greg0658 commented on May 23

    who is selling to who – I’m wondering that one too

    it seems like the players that can trade back and forth with no transaction costs are the main traders these days – pushing up volume and some jumps

    the salesmen were and again today are pushing for more main street involvement – with the pitch “your missing it”

  15. eli commented on May 23

    TexasHippie –

    A large short interest creates a floor because (from my understanding) once the market starts to drop and the person – who actually owns the shares that you borrowed – decides they want to sell.. Then, you have to buy back those shares to be placed back in their account to be sold.

    You aren’t guaranteed the right to ride the stock to zero. You’d need to buy some puts for that.. then you could ride until expiration.. at least.

  16. Estragon commented on May 23

    eli – As I understand it, the requirement to buy back the stock when the person you borrowed if from sells depends on whether the person he sells it to holds it in a cash or a margin account.

    If the buyer holds it in a cash account, it can’t be lent out. If the buyer holds it in a margin account, it can still be lent out, so there’s no requirement to cover the short. In theory, provided the stock continues to be widely held in margin accounts, you could hold a short to (almost) zero.

    My guess though, is that a serious selloff moves stock from weak (margin) hands to strong (cash). This process would be hastened if the stock is not only held in margin accounts, but is actually borrowed against. In that case, the holders would be subject to forced sales through margin calls.

    Buying puts once the selloff is underway might be a problem. Presumably, put sellers would want to short stock to hedge. As it gets harder and more expensive to short to hedge, it follows that there will be a shortage of put writers also?

  17. RP commented on May 23

    Barry – any truth to the news (forget which other economic blog posted it) that hedge funds are selling short, and the folks who are lending the securities to the hedge funds are conspiring with the hedge fund to fail-to-deliver (I assume this means they are lending what they don’t actually own to the hedge funds, and never take action to cover what they lent out since that would drive up the price), thus helping the short make more money despite the appearance of short interest in the market? If true, does it help or hurt the “shorts support the market bid” thesis?

    Or does all this just mean hedge funds are increasing the total short volume because everything they do is magnified by leverage?

  18. Estragon commented on May 23

    RP – I’d guess that the folks lending the securities to the hedge funds are using their ability to monitor flows to front-run. Mere mortals have to make due with stale monthly short stats. Seeing order flow is worth megabucks.

  19. Fred commented on May 23

    — BCA Research 5/22/07

    According to our Global Investment Strategy service, equities momentum might look stretched, but waiting for a correction is likely to prove too costly. While many technical indicators are warning of a correction, the global equity market has continued to grind higher aided by an avalanche of liquid public savings moving into stocks. Recent market behavior resembles that of the second half of the 1995, when the Fed went on hold and share prices escalated. During this episode, stocks consistently looked overbought and ready to correct, however, a sizable pullback only came in 1998. Waiting on the sidelines proved extremely costly. This leg of the bull market is typically both rewarding and volatile. Correspondingly, investors should stay invested but consider an insurance strategy. Bottom Line: The market is overbought but a hard correction is unlikely. Hedge potential volatility, but stay long.

  20. eli commented on May 23

    Estragon –

    Brokerages only lending out shares purchased on margin seems like a good idea for them.. I wonder how strictly they adhere to that.

    So yeah.. a sharp down move might shake out a lot of the margin-longs.. thus making it harder to short (if they would only loan shares purchased on margin).

    As for puts.. well.. you would want to own your puts before the big move. As long as the sharp drop hasn’t occurred, you should be able to get puts if you’ll pay the price.

    If one was willing to admit they did not know when a sharp correction was coming, they could purchase the cheapest out-of-the-money puts starting at 4 weeks until expiration.. and just buy steadily as expiration approaches.

    That way, you could wait for a drop for 3 – 9 years if you wanted.


  21. Greg0658 commented on May 23

    youall lost me

    FDIC secured savings and CDs is good enough for me. I’m one of those guys that has to work for living so youall can push money piles for living.

    I hope my pension fund managers know what you all are talking about.

  22. Ottnott commented on May 23

    Am I cross-eyed, or does the chart show short interest rising in 2001, not in 2000?

    The chart needs to have a NYSE index overlaying the short interest.

  23. Anonymous commented on May 23

    Yes, please overlay NYSE index.

  24. eli commented on May 24

    Ottnott –

    You’re reading it correctly… all this chart shows is: In late 2000, many market participants became convinced that the party was over (since the indexes were “clearly” on their way down at that point).

    I really can’t see what use this chart is.. ‘short interest’ was completely flat during the start of the declines..

    The blurb on the chart should say, “Short interest increased during the mid-2000 to 2003 bear market.

    I mean.. short interest flattened out after markets started to rise again.. it sure seems to trail events as far as 2000 – 2003 are concerned.

  25. Alex Grey commented on May 24

    The spike in short interest prior to the market reaching a peak in 2006-2007 is definitely a different pattern to 2000, where the market fell sharptly easrly in 2000. This early-2000 sharp decline was caught by some short sellers but the large increase in short positions seemingly occurred after this point. On the other hand, the spike in NYSE margin debt we are now witnessing seems similar to that seen in 2000. I still think that the current rise in the market is a margin-driven bubble, the scale of which is only matched by that in 2000. Both of these dwarf a previous spikes in margin debt. Perhaps there is better anticipation of this being a bubble by short sellers this time around.

  26. Ralph commented on May 29

    Very much enjoy your link fest.
    As a builder in lower Fairfield County Ct my experience with the current housing market is very negative. At the risk of adding fuel to the fire. Buyer sentiment is really skittish. No one wants to be the person who could have bought at a better price and since inventory is still rising ( I question the sanity of some of these builders) there is just too much to choose from. It cause buyer freeze! Even the once proven axiom quality rises to the top is clearly being tested. Often people choose volume over quality.

    I sent you a link to my blog an article wrote some months back might be of interest.

    Thanks Ralph

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