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Short Interest (Again) Precludes Correction

Posted By Barry Ritholtz On April 20, 2007 @ 7:19 am In Investing,Markets,Psychology,Short Selling,Technical Analysis | Comments Disabled

No wonder China’s 4.5% correction had so little impact here: There are a record number of bearish bets made on the NYSE [1].

We had mentioned back in October that the then record-setting short interest [2] 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 [3]" — 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 [1]
Lackluster Returns Fail to Discourage; Positions Rise 4.6%
WSJ, April 20, 2007; Page B6

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2007/04/short-interest-again-precludes-correction/

URLs in this post:

[1] record number of bearish bets made on the NYSE: http://online.wsj.com/article/SB117704497204276722.html

[2] record-setting short interest: http://bigpicture.typepad.com/comments/2006/10/record_short_in.html

[3] variant perception: http://bigpicture.typepad.com/comments/2007/01/contrarian_appr.html

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