The contrarians feel the large short position is a sign that things are turning around...while investors "in the now" see trouble

Date:   8/23/2005 9:15:18 AM ( 19 y ago)

Short Interest Sets Record

Most market observers suggest that this bearish sentiment signals a drop in the stock market, but not everyone agrees.

Stephen Taub, CFO.com
August 23, 2005

Are short-sellers signaling gloom for the stock market?

For the monthlong period ended August 15, short-selling surged to a record on the New York Stock Exchange, according to The Wall Street Journal. The number of open short-selling positions rose 2.7 percent from in mid-July, the paper noted, and the short ratio — the number of days' average volume represented by the outstanding short positions — rose to 6.0 from 5.8.




Since investors who "short" a stock are betting that its price will fall, most market observers suggest that this bearish sentiment signals a drop in the stock market, but not everyone agrees.

Indeed, many sophisticated investors, such as hedge-fund managers, use this data as a contrarian indicator.

"The rationale is that if everyone is selling, then the stock is already at its low and can only move up," explains Investopedia.com. "Thus, contrarians feel that a high short-interest ratio is bullish, because eventually there will be significant upward pressure on the stock's price as short sellers cover their short positions.




 

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