Short Interest Continues to Drop, Good or Bad?

Short interest continues to fall on all major exchanges, not just in the US. It would appear that the insane intraday rallies off the lows are nothing more than frantic short covering. This is not how bottoms are made. Real money buyers scaling in for the medium to long term create bottoms.

Despite massive short covering, the markets haven’t been able to move significantly up off the lows and stay there. What happens when the buying from the shorts dries up and the longs aren’t ready to step in yet? Or are unable?

Is declining short interest this close to major lows good or bad? The market seems precariously balanced here...

UPDATE 1-NYSE, Nasdaq short interest continue to drop: “NEW YORK, Nov 11 (Reuters) - Short interest fell on the Nasdaq and on the New York Stock Exchange in late October, reflecting a continued desire by sellers to buy back stock and lock in profits.

Short interest fell 3.1 percent on the Nasdaq from mid- October to late October and on the New York Stock Exchange, it dropped 0.9 percent during the same period. In the previous two-week period, short interest fell even more sharply on both exchanges.

“It was a short covering rally,” said Bill Rhodes, founder and chief investment strategist of Boston-based Rhodes Analytics. “People who have shorted have been taking profits. My sense is that they've said: 'OK I've hit a plateau here.'”

But while short interest continued to decline, the pace of the drop has slowed.

“The shorts have slowed their buying and the market is feeling the effect,” said Dylan Wetherhill, president and founder of short interest tracking website ShortSqueeze.com. “If the market can gain some traction it will cause more buying to set in.”

Investors who sell securities “short” profit from betting that stocks will fall. Short-sellers borrow shares and then sell them, waiting for the price to fall so they can buy them back for less, return them to the lender and pocket the difference.

On the NYSE, short interest fell to 13.46 billion shares as of Oct. 31, down from 13.58 billion as of Oct. 15. During the same period on the Nasdaq, short interest fell to about 7.86 billion from 8.11 billion shares.

The data on Tuesday showed the short ratio on the Nasdaq, or the average number of days it would take to cover outstanding short position, fell to 2.73 days as of Oct. 31, down from 3.43 in late September. At the NYSE, short interest was equal to 3.52 percent of the total shares outstanding.”