- How one might interpret “Short Interest” data to aid timing of trades
- SZYM & NSPH as Current examples and their trend
Shares sold short are shares sold first that need to be purchased in a future time period. Short interest in a stock is usually stated as the number of shares sold short, as a percent – the percent of the shares “floating” (not held by insiders or 5% or more holders) or in “days to cover” based on present average trading volume.
Conventional wisdom is that the greater the number of shares sold short, the more buying power is in the company’s stock. If all the shorts try to buy at the same time it is called a “short squeeze” and the share price can rise rapidly. In this case and if the shorts are on the wrong side of the trade, one could also say, “filling their shorts”. This is presented as a positive or bullish case for the stock price… This may be true some of the time but in my experience not the majority of cases.
My own experience is that short sellers are very smart and tenacious in their mission – buying back their shares sold short at a low price. Therefore I get very nervous when I see a stock I really like with a large or growing short interest. Two thoughts pop into my mind –
- What do they (the shorts) know that I don’t and
- What tactics will they (the shorts) use to drive the price lower?
Besides being smart, short sellers are ruthless in using whatever tools they can to drive the price down – they are activists as a rule.
Like any tool in our stock market toolbox, one indicator should not be used alone, but in concert with other tools to get a weight of the evidence.
Yahoo Finance Key Statistics lists short interest and percent (%) of the Float Short – Yahoo (however) has not been updating these numbers in a timely manner. I would suggest using the www.NASDAQ.com site to get more up to date information on short interest and the trend.
Two stocks I would like to point out related to current short interest:
SZYM* $8.69 – Solazyme is a very heavily shorted stock. At the same time it is a company that LOTM has singled out as one of our top long-term core holdings. This combination makes me very nervous. What do the shorts know that I don’t and / or what will they do to drive the price lower? Other than the time required getting to dramatically higher revenue I don’t see much wrong with SZYM.
I really like SZYM long-term but, ladies and gentlemen, be ready for anything in the short term.
NSPH* $0.60 – Nanosphere is also one of bigger share position and I love the technology long term Management has flubbed the process so NSPH finds itself in need of more cash. There might be additional issues behind the scene that I am unaware of. The stock has dropped sharply in recent weeks raising my anxiety level. When I look at the trend of short shares for NSPH I actually started breathing again and relaxed a bit. I was very happy to see the short position declining. This suggests that the shorts might be thinking there isn’t much profit left in the stock on the downside.
NASDAQ makes it easy to list your portfolio holdings and look at them in an efficient way. I recommend that you do this but…. keep in mind that this is one tool and alone is not a reason to base a decision. On the other hand it might be the tool whose weight of evidence, combined with other data, moves your decision one way or the other.
* An account related to LOTM holds a position in this security.
Neither LOTM nor Tom Linzmeier is a Registered Investment Advisor. Please refer to our web site for full disclosure at www.LivingOffTheMarket.com