It has been posited that short squeezes might be behind some of the rallies we’ve seen recently.
It would help to explain some of the macacque-level volatility and the markets’ willingness to rebound at any vaguely positive headline with Merkozy in it (Bruni-Sarko baby news, anyone?).
In fact, shorting specialists Data Explorers have put a big fat NO on that short-covering theory:
Yes, US large cap shorts have risen by more than a fifth over summer to 3.13 per cent of oustanding shares. But while short interest has fallen in the past few weeks, it’s not a dramatic fall and there’s not much evidence of correlation to shares that are rising — at least not enough to explain the S&P500′s upticks:
On the whole, short interest for the S&P 500 Index has fallen from 3.12% of shares outstanding at the end of September, to 3.02% on the 17th of October, a 3% decline. Looking at the changes in short interest, we find a roughly even split between shares which saw an increase and those that saw a decrease in short interest in the last 2 weeks.
Furthermore, the shares that have seen an increase in short interest during October started the month with below-average levels of shorts, while the reverse is also true — in other words, some kind of convergence around the mean seems to have taken place. Extremes at either end don’t support the short-covering theory either; First Solar, a long-time favourite for short-selling, saw short interest decline, but so did its share price. Netflix’ short interest rose, and so did its share price.
You get the picture. Looking at the top and bottom 50 didn’t add to the case, either:
To further establish whether short sellers were squeezed out by recent price movements, we analyzed the behavior of the 50 most shorted shares at the start of October and found that these shares performed worse than the 50 least shorted shares over the period. The heavily shorted shares saw a 6.4% average return compared to 8.2% average return for the lightly shorted shares. It is worth noting that only one share, Medtronic, Inc (NYSE:MDT), saw a decrease in price.
Finally, Data Explorers looked at the shares that had moved the most during the month, and, guess what?
We found that short sellers decreased their average bets by only 0.3% in the 50 shares which saw the greatest price decreases. They increased their positions by only 0.1% of total shares in the 50 shares with the greatest price increases. It is worth noting that shares which have performed well in the last couple of weeks had a below average short interest of 2.8% coming into October.
Okay then. Back to the news.
Related links:
Breaking – Europe is saved! Actually, wait… - FT Alphaville
Is there such thing as the FT effect? - FT Alphaville
Introducing the volatility macacque - FT Alphaville