Short Covering or Oversold Bounce?

The average S&P 500 stock went up 4.94% yesterday.  But was it a short-covering rally or an oversold bounce?  We ran our decile analysis on the index to find out.

To run our decile analysis for short interest, we simply break up the S&P 500 into 10 groups of 50 stocks based on short interest as a percentage of float.  We then calculate the average performance yesterday of the 50 stocks in each decile.  As shown in the first chart below, the 50 stocks in the S&P with the highest short interest as a percentage of float were up 5.80%.  The 50 stocks with the lowest short interest were up 4.20%.  In general, stocks with higher short interest outperformed stocks with lower short interest yesterday, but not by too wide of a margin.

We also ran our decile analysis based on how stocks performed last Thursday and Friday.  This tells us how well the worst and best performing stocks during the 2-day correction did yesterday.  As shown in the second chart below, the stocks that did the worst last Thursday and Friday averaged a gain of 7.09% yesterday, while the stocks that held up the best last Thursday and Friday only gained 3.40%.  There was significant outperformance yesterday by the stocks that got beaten up the most during the pullback.  While there was surely short covering, investors were mainly bidding up stocks that got hit the hardest last week.

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