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The Short Index
The Short Index
Shorting is highly regulated and US stock exchanges are required to report to financial regulators any short positions by the end of day. This data is made by stock exchanges available to the public.
Here is an excerpt from Nasdaq publication for AMD
| Settlement Date | Short Interest | Avg. Daily Share Volume | Days To Cover |
|---|---|---|---|
| 11/30/2023 | 44,739,272 | 39,425,935 | 1.134768 |
| 11/15/2023 | 40,903,051 | 65,193,369 | 1 |
| 10/31/2023 | 31,511,742 | 53,196,929 | 1 |
| 10/13/2023 | 31,516,655 | 52,228,206 | 1 |
| 09/29/2023 | 28,964,119 | 52,321,388 | 1 |
| 09/15/2023 | 30,062,210 | 52,021,594 | 1 |
The data tells us how many short positions are open at a given date. Furthermore "Days to Cover" estimates how long it would take to close all those positions. This summary however does not say to how many short sellers those shorted shares belong.
How can we interpret this data?
This data gives us an insight into the overall sentiment of a given stock. A stock with high short interest indicates that investors believe that the stock is overvalued.
What it also indicates is, how easy it will be for a short sellers to buy back their stock given the usual trade volume. This is a particularly challenging aspect for investors with large positions since buying back stock will lead to an increase in the stock price. If the stock price is raising despite a high amount of short interest, then traders may experience the infamous short squeeze - a phenomenon where the price increase causes a chain reaction.
What is a short squeeze?
A short squeeze is a scenario that occurs when a heavily shorted stock sees a rapid increase in its price, causing short sellers to rush to cover their positions to limit their losses. Here's how it generally unfolds:
High Short Interest: Initially, a stock becomes heavily shorted when many investors have taken short positions, betting that the stock's price will decline.
Price Increase: If, for any reason, the stock's price starts to rise instead of falling, it can create pressure on short sellers.
Forced to Cover: As the stock price climbs, short sellers face increasing losses. To limit their losses, they may be forced to buy back the shares they borrowed at higher prices.
Increased Demand: When multiple short sellers start buying shares to cover their positions, it increases the demand for the stock.
Feedback Loop: This increased buying pressure from short sellers trying to cover their positions can further drive up the stock price.
Rapid Price Surge: As more short sellers scramble to cover their positions, the stock price can skyrocket rapidly, creating a cascade effect known as a short squeeze.
This scenario often leads to a dramatic and quick surge in the stock's price, causing significant losses for short sellers who are caught in the squeeze. It can also attract more attention from other traders, leading to increased volatility and trading activity.
Short squeezes can happen due to various reasons such as unexpected positive news about the company, a strong bullish sentiment from retail investors, or even coordinated efforts by retail traders on social media platforms to target heavily shorted stocks.
How can I use this information?
Unfortunately, we cannot directly predict based on the high short interest alone whether the price will drop but it may suggest that a company is worth further analysis. It indicates that the stock experience significant downward pressure but has also the potential of a rapid rise in price if a short squeeze occurs. Some traders use this to screen for trading opportunities.
