Chart of the Day

Today’s chart is from Zero Hedge (h/t Bullion Baron), showing how New York Stock Exchange (NYSE) short interest has returned to July 2009 highs (black bars) vs the S&P 500 (red line), the broadest US stock market measure.

What is short interest? It’s a measure of the number of shares that have been borrowed (the “interest”) and subsequently sold (the “short”), in expectation of further price falls. Like margin lending measures, it creates extra pressure by increasing the flow of money into the market – this time on the downside during a correction – but can also have a violent affect on the upside when the short sellers need to “cover” their interest, and buy back all that stock.

After last night’s reversal rally in Europe and the US, although relatively weak, coming into the US Federal Reserves meeting on September 21, there is an extended probability that the abundance of shorts may need to be covered.

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  1. Yes, as you’ve alluded to, these bears have already made their play and sold. They can’t sell again, but do have to buy back at some point.

    Hence, fast and furious upside market action can happen at any time.

  2. My NY banker mate says this is going on, but also consistent move out of equities and selling vested stock rather than allowing it to run the full 10 years hoping on a better result. Also hedge funds now with 30-50% in cash now. Look at the DXY:IND spiking back up.

    Thanks Prince.

    • True the DXY has broken out, but the last couple days of action has heavy selling on the upside (long tails).

      For mind this currently looks like a pause in the US dollar rally (i.e an unDollar correction), but patterns can morph into new patterns swiftly.

      There were MANY 3,4, and above % rallies in a day (and even a few 20% in a month rallies) during the end of 2007 to start of 2009….and also (so as not to be accused as a stock bull, FFS), many rallies during the bear market of 2001-03.

  3. Recent S&P 500 trading looks a lot like the early months of 2008 to me… ie. the finishing touches to the initial thrust in a new downwards bear leg, to be followed by a period of consolidation, before things get really nasty.

    So I’d be interested to see the short interest from late 2007 onwards, to see how the current numbers compare with early 2008.

    In any case, looks like a false upwards trend line break last night for the S&P. If that false break is de-falsified in coming sessions with an upwards follow through, yep the shorts are gonna be squeezed:

  4. New York Stock Exchange (NYSE) short interest has returned to July 2009 highs (black bars)

    Of course short interest peaked in March/April 2009, which would have been rather a good time to buy 🙂

  5. assuming the black bars are a total volume (?) it would also be nice to see a % dollar volume.

    Does anyone do this for the ASX?

    • Not that I can find Dr Nick, which is infuriating, as I would like to complete the “other side” of a model following cashflows. (margin lending being the first side)

      • yes getting some rough idea of borrowing on both buy ans sell sides would be useful.

        I can develop an application that takes the daily shortsell data (plus whatever historical data exists (I think it goes back to the GFC and the rule changes that occured back then) and sticks this in a SQL database etc. …if anyone was interested in paying for such a thing.

        • as per my comment below to me109 we know where this daily short sell data exists. The comment related to whether a service already tabulates it in the manner presented in the chart.

          further clarification:

          the daily short sell data is released by the ASX. it is public information. To produce a chart like the one shown in this article you would have to collect this data yourself every trading day and work out the total volumes etc. So the question was whether anyone actually already does this in this country and reports it.

      • that is an excel version of the stuff the ASX publishes daily. what I was referring to was a service that produces data as per the chart in this article.