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Just a Short Covering Rally?

The market gain we've seen over the last three days has been quickly dismissed as nothing but a short-covering rally by seemingly anyone and everyone that has opined on the subject.  But has it really been a short covering rally?  If it has been, shouldn't the most heavily shorted stocks be rallying the most? 

To find out, we broke the S&P 500 into deciles (10 groups with 50 stocks each) based on short interest as a percentage of float and then calculated the average performance of the stocks in each decile since last Thursday's close.  In a true short covering rally, the decile of stocks with the highest short interest will significantly outperform the decile of stocks with the lowest short interest, and the performance will get better and better as you move up the decile chain from lowest to highest.  As shown below, however, the performance of deciles based on short interest during the current rally has been completely scattered, with no deciles standing out.

It's certainly convenient and easy to use "short covering" as the reason for any rally, but it's definitely not always the case.  Most of the time it's simply the token explanation that's used when there's no other glaring reason staring strategists in the face.

Below is a list of the S&P 500 stocks with the highest short interest as a percentage of their equity float.  As shown, AutoNation (AN) tops the list with nearly a third of its shares sold short.  First Solar (FSLR) ranks second at 31.68%, followed by Sears Holdings (SHLD) at 31.18%.  Other notables on the list of heavily shorted stocks include Netflix (NFLX), US Steel (X), Urban Outfitters (URBN), Best Buy (BBY), Whirlpool (WHR) and Chipotle Mexican Grill (CMG).

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