Forget the Economy, Look at Short Interest
- Posted by JC Parets
- on August 11th, 2012
Are we trying to make money here or do we just want conversation pieces? I get into a lot of discussions with people about the market and where I think it’s going. And for some reason they always come back with some sort of economic or political issue. Are we in running for office or we trying to profit from the marketplace? What the hell does Paul Ryan have to do with S&Ps this week? And this Fiscal Cliff nonsense – enough already.
The stock market doesn’t care about your economic issues and political beliefs, so leave it alone. The only thing that drives price is buyers and sellers. Period. End of story. (I went on a similar rant last week, so I’m sorry and I’ll leave it alone for now).
Back to price. Buyers and Sellers right? The question that often gets raised is, “So where are the buyers coming from?”. And my friend Ryan Detrick over at Schaeffer’s Investment Research has a couple of great charts showing exactly where some of these buyers are coming from. You see there is a little known secret about the stock market and how works. A lot of people don’t know this but the only way to unwind a short position is to go out and buy it. But don’t tell anyone ok?
So when Short Interest peaks and begins to roll over, the new trend brings in a whole fresh group of buyers into the market. Last time we saw this shift was last Fall, when it helped spark a 30% rally for the S&P500 in just 5 months (40% for the Russell2000). And this is why Detrick is one of my favorite technicians – he nails it here:
“…the overall trend in total short interest on all optionable equities (about 2,600) has peaked and is moving lower. Our theory is that increasing short interest can act as a headwind to any rallies, but once the shorts begin to cover, it can be very bullish…..check out the overall trend. It looks like short interest has peaked, and as long as it keeps moving lower, this is another bullish tailwind.”
And the longer-term chart shows the same thing. When the tide turns in short interest, look out. The shorts are covering and these trends typically stay for a while. Tough to be bearish in that sort of environment.
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) and is a member of the Market Technicians Association. More
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