Short interest is dropping to new lows

by Wayne Ferbert on April 11th, 2013

My co-author wrote a great piece yesterday on this blog on the rally in the markets since the jobs number on Friday. He rightly identified this rally as a short-squeeze. That technically means there has been some real capitulation from the short sellers in the market. That capitulation is usually a harbinger of good things to come in the market. Usually.
I checked the exchange data on short selling in some popular ETFs. The exchanges publish the data twice a month. The last data point we have is the end of March. It is interesting data. All of the SPDR select sectors had a decrease in short interest. Many of those decreases were material in nature.
For instance, Consumer Discretionary and Consumer Staples sector ETF saw short interest decline by 10% & 8%, respectively. The Financials SPDR decreased by 12% and the Industrials sector ETF declined by 9.5%. These are some real moves in one month.
Oddly, the S&P500 ETF (SPY) had a small spike in short interest from March 15th to March 29th. It spiked up 5%. I think this was an anomaly. The SPY is not the only vehicle for creating short interest in the S&P500. However, the SPDR Sector Select ETFs are one of the few ways to get good sector exposure. I trust the individual sector data rolled up. Short interest is waning.
In fact, for the SPY, even though it spiked slightly to 248m shares at the end of March, that compares to 457m shares in December 2012.
Can you imagine what the short interest will be reported as for the 15th of the month after this 4 day rally since the mid-day low on Friday after the jobs report?
These are signs of capitulation – which technical traders will tell you is a sure sign that a break out is coming.
I am not necessarily in that camp. However, I can see their point. But contrarians make their bets against the grain. This data might be just the sign you’ve been looking for to make that bearish bet. Given current data, it certainly would be a difficult trade to make – but one that could pay handsomely.
Or just use these new highs as a great new level to set your hedges at new higher levels – if they are expiring soon. 

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