Short interest can be a useful sentiment indicator, as it measures the level of investor pessimism toward a given stock. Specifically, short interest is created when an investor sells shares of a stock that he or she has borrowed from a broker, but does not own outright. A basic short-selling strategy is profitable when the price of the shorted stock declines, allowing the investor to buy the stock back at a lower price in order to replace the borrowed shares. Thus, the short seller hopes – and likely assumes – that the stock he or she has sold short will continue to drop.Twice a month, brokerage firms are required to report the number of shares that have been shorted in their client accounts. This information is compiled for each security and then released to the public. By monitoring changes in a stock's short-interest figures, investors are able to gauge the public's level of pessimism toward the stock. Generally speaking, a high volume of short interest indicates that investors have a negative outlook for the company (although heavy short interest can also be created out of arbitrage situations, such as mergers and the release of convertible bonds). From a contrarian viewpoint, we see this pessimism as bullish for the stock if it is in an uptrend.
Short Interest as a Bullish Indicator
Why is heavy short interest a bullish indicator? Well, a substantial accumulation of short interest on a particular stock leaves the door open for a potential short-squeeze rally. This situation typically occurs when an equity suddenly moves sharply higher – perhaps as the result of a positive earnings surprise, or an analyst upgrade. A sharp increase in price results in a loss for the short sellers, forcing them to cover (or buy back) their bearish bets in order to minimize the damage. This rush to cover their shorted shares leads to further gains in the shares, and in turn draws more short sellers into covering their positions.Yet, this kind of short-squeeze situation is not necessary for a bullish investor to reap the benefits of this bearish sentiment. Heavy short interest on a rising stock can help fuel the security’s rally as these shorted shares are slowly and steadily unwound in the form of buying pressure. On a strongly uptrending security, a healthy accumulation of short interest can be thought of as sideline cash should the stock's gains continue.
Short Interest as a Bearish Indicator
Can heavy short interest be used as a bearish indicator? Actually, it can. If a stock is in a sharp downtrend and is also faced with a heavy amount of short interest, we could see the stock suffer additional significant losses as the bears increase their short positions. In these scenarios, we consider the bears to be "in control" of the stock, as continued downward momentum gives the shorts very little motivation to exit their winning trades.
Measuring Short Interest
There are two key indicators that are used to measure the level of short interest: the short-interest ratio and short interest as a percentage of a stock’s total float. The short-interest ratio is determined by dividing the total number of shares sold short by a stock’s average daily trading volume during a one-month period. The short-interest ratio is a rough estimate of how many days it would take investors to buy back all of their shorted shares at the stock’s average daily trading volume. For our purposes, we typically view any reading above 5 as a sign of heavy pessimistic sentiment.Meanwhile, the percentage of a stock’s total float (or the total number of shares of a company available for trading) that has been dedicated to short selling is another indication of how bearish investors might be. For our purposes, we typically view any readings above 10% as a sign of heavy pessimistic sentiment.
FAQs
Most stocks have a small amount of short interest, usually in the single digits. The higher that percentage, the greater the bearish sentiment may be around that stock. If the short % of the float reaches 10% or higher, that could be a warning sign.
Is short interest a good indicator? ›
Short interest data is a useful indicator of market sentiment, but it's not perfect. For example, the information related to the total number of shares that are sold short for a particular stock may lag, and may not be entirely accurate.
How to get real time short interest? ›
You can generally get generic short selling statistics on any website that provides a stock quotations service, like the proportion of the short interest (which represents the proportion of a remaining stock that has been short-changed divided by the average daily volume).
How can increasing short interest be bullish? ›
Contrarians feel a high short-interest ratio is bullish because, eventually, there will be significant upward pressure on the stock's price as short-sellers cover their short positions.
How much short interest is needed for a squeeze? ›
Short interest is considered “high” when it rises above the 20% mark. The higher it rises, the more susceptible it becomes for a squeeze. For example, a stock with a 57% short interest is more likely to squeeze than a stock with a 22% short interest.
Is short squeeze illegal? ›
Although short squeezes may occur naturally in the stock market the U.S. Securities and Exchange Commission (SEC) states that abusing short sale practices is illegal. In addition, short sales used to manipulate the price of a stock are prohibited.
What is the most shorted stock right now? ›
Most Shorted Stocks
| Symbol Symbol | Company Name | Float Shorted (%) |
|---|
| SMX SMX | SMX (Security Matters) PLC | 153.60% |
| AILE AILE | iLearningEngines Inc. | 130.77% |
| MAXN MAXN | Maxeon Solar Technologies Ltd. | 82.70% |
| RILY RILY | B. Riley Financial Inc. | 73.71% |
44 more rowsPut simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money.
What number is considered high short interest? ›
Short interest as a percentage of float above 20% is considered high, and it indicates a very pessimistic sentiment.
What are the 10 best stocks to buy right now? ›
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| Company (ticker) | Analysts' consensus recommendation score | Analysts' consensus recommendation |
|---|
| ServiceNow (NOW) | 1.49 | Strong Buy |
| Assurant (AIZ) | 1.50 | Strong Buy |
| Howmet Aerospace (HWM) | 1.50 | Strong Buy |
| Insulet (PODD) | 1.50 | Strong Buy |
21 more rowsSearch for the stock, click on the Statistics tab, and scroll down to Share Statistics, where you'll find the key information about shorting, including the number of short shares for the company as well as the short ratio.
How to find stocks with high short interest? ›
HighShortInterest.com provides a convenient sorted database of stocks which have a short interest of over 20 percent. Additional key data such as the float, number of outstanding shares, and company industry is displayed.
How to predict short squeeze? ›
Scanning for a Short Squeeze
- The number of shares short should be greater than five times the average daily volume.
- The shares short as a percentage of the float should be greater than 10%
- The number of shares short should be increasing.
Measuring Short Interest
There are two key indicators that are used to measure the level of short interest: the short-interest ratio and short interest as a percentage of a stock's total float.
What is a short squeeze for dummies? ›
Short squeeze is a term used to describe a phenomenon in financial markets where a sharp rise in the price of an asset forces traders who previously sold short to close out their positions. The strong buying pressure “squeezes” the short sellers out of the market.
How much short interest is considered high? ›
Short interest as a percentage of float above 10% is fairly high, indicating significant pessimistic sentiment. Short interest as a percentage of float above 20% is extremely high.
Is 10% interest rate too high? ›
At this time, 10% is a good interest rate for a personal loan for a borrower with good credit. Anything below the national average personal loan interest rate, set by the Federal Reserve, is considered a good personal interest rate. Borrowers with poor credit scores will likely be offered a higher interest rate.
Is 10% interest possible? ›
Junk bonds are high-yield corporate bonds issued by companies with lower credit ratings. Because of their higher risk of default, they offer higher interest rates, potentially providing returns over 10%. During economic growth periods, the risk of default decreases, making junk bonds particularly attractive.
Is 20% short interest a lot? ›
However, a short interest as a percentage of float above 20% is generally considered high, which could indicate significant negative sentiment.
