Looking At Shorts
Frequent readers of this column know that I have dedicated a significant
amount of space to writing about US equity market positioning, as measured
through fund flow data. The reason why I keep revisiting this theme is
twofold: first, to point out that investors are far from euphoric about the
stock market, and therefore not complacent. And second, to highlight the fact
that should the economic recovery and profits continue to improve, there
could be additional buying pressure to sustain the move up in the stock
market as the bears capitulate. In an effort to further my case, I would like
to add an additional perspective to gauge investor positioning/sentiment.
Short interest measures how aggressive market bears are feeling. Typically,
it is expressed as a ratio, which takes the amount of short sales–positions
betting that a stock will go down–and divides it by the total outstanding
shares. The higher the number, the more bearish the market. However, high
readings can often be interpreted as bullish since investors who are short
will need to buy back these shares should the market goes up.
The most recent data for the New York Stock Exchange gives a short interest
ratio of 2.30%, as shown in the graph below. As one can see, this number is
quite high relative to the values of the ratio during the 2 year bear market.
In fact, the current reading is close to its ten year highs, made in the
months following the Worldcom debacle last year.
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In sum, empirical market data continue to suggest investor caution rather
than complacency, which should lend itself to added upward buying momentum in
stocks in the months ahead as the economy and corporate health continue to
rise.
Edward Allen