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Monday, July 16, 2012

Short interest

I have seen a few articles talking about how bullish the current short interest figures are.  Here is an interesting chart.

We can see the short interest figures are at elevated levels that have spawned big rallies.  However, the normal fear associated with such high figures is missing.  Here is the II survey covering the last two years.

As you can see the number of bears has stayed in the 20s throughout the entire sell off.  In most sell offs with such negative breadth readings, the number of bears crosses above the number of bulls like they did in 2010 and 2011.  We never even got close to that.  These are normal numbers of bears for when the market is going up.

Here is a monthly chart of the VIX.

The other short interest spikes were accompanied by VIX readings of at least 40.  We never even got above 30 this time.  At the early June low, the NAAIM and Nova/Ursa indicators did not get to levels consistent with major lows.  Those surveys are showing active traders being positioned long now.

I hate to use this expression, but it really is different this time.  Who exactly is short in such a big way?  The sentiment surveys would seem to indicate it is not the usual shorting crowd.  Check out these charts from early 2008.

The subprime mortgage mess first hit the news as seen in the circled area on the SPX chart. The fear evaporated quickly as the market mounted a big rally from that low.  However, short interest started rising with the market in a big way from that low.  We can see that the 2007 time period had really extreme levels that were way above the prior four years.  I recall seeing articles saying how bullish the short interest data was for the market.  Of course we now know those shorts were actually right that time.  In recent years short interest at these levels has been bullish for the market.  However, we don't have the usual fear that was present in those cases.  We also know that at least one time in history the shorts were right.  Only time will tell if this is a bullish situation or not. 


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.