NYSE Experiences Record Short Selling

by: Barry Ritholtz

No wonder China's 4.5% correction had so little impact here: There are a record number of bearish bets made on the NYSE.

We had mentioned back in October that the then record-setting short interest on the Nasdaq was precluding a major correction from occurring.

Today, we see a similar record setting short selling having the same impact -- only this time, it is on the NYSE instead. From this morning's WSJ:

"Short-selling activity jumped to another record on the New York Stock Exchange despite the tepid returns that such bearish bets have garnered so far this year.

For the monthly period ended April 13, the number of short-selling positions not yet closed out at the New York Stock Exchange -- so-called short interest -- leapt 4.6% to 10,989,496,813 shares from 10,510,404,017 shares in mid-March.

Market-wide, the short ratio, or number of days' average volume represented by the outstanding short positions at the exchange, fell to 6.1 from 6.2."

Despite a myriad of potential pitfalls facing the market, that we have noted in the past, overly large short selling creates a bid beneath the market. When grateful shorts cover, they prevent any downside momentum from developing.

If part of your thesis is investing due to "variant perception"- the belief that you have figured out something the rest of the investment community hasn't - then statistically speaking, the short side isn't really the ideal place to be when short interest is at record highs.

At that point, shorting is more akin to consensus investing, going along with crowd. Even if you do so independently . . .


Bearish Bets Hit a Record On the NYSE
Lackluster Returns Fail to Discourage; Positions Rise 4.6%
WSJ, April 20, 2007; Page B6