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Wednesday
Jul062011

Not a Short Covering Rally

It has been difficult to listen to so many market commentators call the gains we've seen since last Monday nothing but a short covering rally.  The worst part is that the claim is made with no data backing it up.  We ran our decile analysis on the S&P 500 to see what the actual numbers show.

To run the analysis, we broke the S&P 500 into deciles (10 groups with 50 stocks each) based on a stock's short interest as a percentage of float.  We then calculate the average percentage change of the stocks in each decile from the close on June 24th through today.

The average stock in the S&P 500 is up 5.4% since June 24th.  As shown below, the 50 stocks that have the highest amounts of short interest have averaged a gain of just 5.2%.  The stocks in the second most heavily shorted decile are only up an average of 4.9%.  With the top two deciles of the most heavily shorted stocks both underperforming the overall market, it's hard to call this a short squeeze rally.

References (4)

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    Bespoke Investment Group - Think BIG - Not a Short Covering Rally
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    Bespoke Investment Group - Think BIG - Not a Short Covering Rally

Reader Comments (2)

Re: "The worst part is that the claim is made with no data backing it up."

There is the data to back it up (but you have selectively ignored it).

For example (just to name a few)

Prior to last week, NYSE short interest was reported to be the highest in 2011, at 13.5 billion shares.

The short covering rally was on below abysmal volume.

Etc.

July 6, 2011 | Unregistered CommenterMike

BTW, last time we had such ~5% S&P-500 in one week short covering rally was in Fall of 2008 (yet another example that these short covering rallies on low volume often have nothing to do with the actual economy -- most traders who bought that 2008 rally lost money in the following months).

July 6, 2011 | Unregistered CommenterMike

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