In fact, as stated previously, stocks in general have continued to rally since October 15th, so it is possible shorts got squeezed even more. The PowerShares Nasdaq 100 ETF (QQQ) for example, rallied another five percent in the past eight sessions, nearing an all-time high. Short interest has substantially come down – from 71.7 million in the middle of September to 46.5 million one month later, but was 42.4 million as early as two months ago, and even lower if we go back further. The point being there is room for it to come down more.
On an index level, short interest continues to remain elevated. In the latest period, it fell 1.3 percent on the Nasdaq Composite, but the prior period was the highest since the middle of September, 2008 (see chart 3 above). The green bars are nowhere near as tall as they were in 2008, but remain near cycle highs. As and when the bars shrink, the red line, which is shown inverted in the chart, rallies.
It is the same relationship in Chart 4, which shows short interest on the NYSE Group. In the latest period, short interest fell 2.2 percent – nothing material considering the buildup that has gone on for the last several months. At the end of September, short interest was the highest since the end of August, 2008 (see chart 4 below) – a potential recipe for squeeze.
This is what the bulls are hoping for. But are the ingredients in place for this to occur?
Fundamentally, as things stand, there is not much to get excited about. Operating earnings of S&P 500 companies are expected to drop 2.7 percent this year, to $109.95. The economy continues to act tentative, with even the erstwhile-hot job market showing some cracks of late, and businesses continuing to shy away from capital expenditures.
Technically, the major U.S. stock market indices have repaired a lot of the damage inflicted during the August sell-off, thanks in particular to last week’s dovish talk/action by the ECB and PBoC. But this is transitory. When it is all said and done, buyers need to be willing to put new money to work. That is what is lacking. Corporate buybacks may soon pick up, but equity flows and margin debt are not cooperating. Mid- and small-caps are severely lagging large-caps.
Hardly a recipe for the continuation of a short squeeze. Particularly considering signs that longs may be using the rally as an opportunity to exit/lighten up.
Thanks for reading.
Twitter: Â @hedgopia
Read more from Paban on his blog.
No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
