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Short Selling Surges to Record
Posted By Barry Ritholtz On June 22, 2006 @ 5:48 am In Markets,Psychology,Technical Analysis,Trading | Comments Disabled
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
PETER A. MCKAY
WSJ, June 22, 2006
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