It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle. -Sun Tzu
Wise words to remember, and applicable to so many experiences in one's lifetime. Struggling with that test in seventh grade, seeking the attention of that stunningly beautiful girl across the room, moving ahead in one's job or business venture, investing and trading in the stock market...
Ahh, there we go.
You see the enemy is not always brandishing a sword and donning a full suit of armor and staring you straight in the face. The enemy is a goal, and for all intents and purposes here, that goal is making money.
But to do this, you must know two things. As a "long" you must know yourself (your investment, and your army of other nameless, faceless investors) and you also must know your enemy (that dastardly short!, and his army of detractors and naysayers). Are you, instead, short? Well then reverse the above, and that long is your enemy, and your "win" is through their failure.
Winning this metaphorical war can be compared to a game of chess. You must look at the present, and the future. The past is only a useful tool in two ways:
1) To tell you what the enemy *did*
2) To tell you what the enemy *might do*
As my position is currently long in SiriusXM (NASDAQ:SIRI), I want to explore the long side. As such, for the rest of this article, the shorts shall be the enemy. I want to zero in on a topic recently brought up here on Seeking Alpha. A little information on the enemy of the long and what they have been up to -"Short Data."
Let's attack it. As many investors know, Nasdaq releases bi-weekly short interest reports twice per month. What is contained within this data? Well, let's look at SiriusXM's most recent data point from 1/31/2012.
Short Interest : 304,862,970. This is the short interest at close on 1/31/2012. This is not an "average" as some believe, but the single data point from that one day.
Each FINRA member firm is required to report its "total" short interest positions in all customer and proprietary accounts in NASDAQ-listed securities twice a month.
There are two other points of data released with the short interest.
Average Daily Share Volume: 63,744,120
Days To Cover: 4.78
What we have here is the short interest from one day, divided by the average daily share volume of many days, to arrive at the days to cover. As an attentive reader you may be sitting here scratching your head with a few questions, wondering how this data even makes any sense.
It doesn't. It is, for all intents and purposes, useless. I'll tell you why. Let's start with the short interest number itself. This is a single day number, not an average. The day before, short interest could have been 280 million, and the day after 260 million. You absolutely can not spot a trend or gather anything significant by looking at one picture out of 15 days.
Let's move on to the average daily share volume and days to cover. This is even less useful, as the days to cover number is arrived at by dividing the one day short number by the average daily share volume. There's a problem with this. Days to cover is only applicable if the short interest remains a constant, and the average daily share volume continues to remain stable and... and... the entire daily volume for that many days contains only short covering trades. The chances of that happening are zero point zero.
To add to the uselessness of this number, is the fact that it is only released 9 or more days later than the settlement date. By the time you get it, it is over a week old.
And on top of this, there are so many figures which go into this old and outdated short number, the 304,862,970, that further confounds the ability to get anything useful out of it. How much of that is market maker shorting to fill demand (which is bullish). How much of that is short positions which are shorted against in the money options and convertibles (which is neutral). And how much of that are pure shorts (which is bearish).
This data, in the war of the long, is a smoke screen, and the army of the shorts will scream it out like demoralizing propaganda through media and blogs, hoping you will turn and run and leave your shares behind you.
There are other options out there for short data which will give you, the investor, a much better view of activity within the marketplace. For that, we need daily short data, not week and a half or more old data from 1 day out of 2 weeks. I get my data from all over, but my source for the following is Satwavespro, where I can get it all in one place with respect to SiriusXM. For those that do not have access there, daily short data can be gathered manually from the different exchanges.
To appropriately use daily short data, one should combine that with money flows. For this I use AVAFIN.
This will give you a much better idea of what exactly happened on 1/31/2012. Here are the data points for SiriusXM on that date.
- Closing Price $2.09
- Price Change +2.87% (+5.5 cents)
- Volume 53.7M (open trades)
- Short Volume 59.64% (open trades)
- Cash flow +56.36M
Oh my gosh! Short volume is over 50%! The price went up! Surprised? It's not surprising at all. This short volume percent here is comprised of many things.
- True short activity as most understand it. Those betting against the stock by selling the shares outright (bearish)
- Market makers shorting to fill demand (bullish)
- Activity from those shorting against a long option position or other hedged position (neutral)
The key here is *Cash Flow." To arrive at conclusions about the daily short volume, we must understand that the bearish and neutral bets above yield negative cash flow. The bullish short activity will yield positive cash flow, thus you can have a high short volume day, with positive cash flow, which can be interpreted as a bullish sign.
Is this a guarantee? No, nothing is. But by using the proper data we can dig a bit deeper into what the enemy likely did *today* or even for the past 30 days, 90 days, 1 year... instead of looking at a point of data from 2 weeks back and making incorrect and very outdated assumptions from that.
As I am currently long, I take great comfort in knowing that my little army (and yes, that includes the market makers and their shorting to fill demand) is fighting with enthusiasm and good morale. I can check in on them daily with the above data, and plan for the longer term, or make adjustments to my position right now.
I can now brush away the smoke screen of the misleading and useless Nasdaq bi-weekly outdated short interest data, and uncover the thieves and spies within seeking to steal my shares.
I see an enemy sweating and cringing behind its painted masks. I see an enemy caught suddenly by the sudden spike in share price on January 5th. I see an enemy that is desperate, weakening, fighting a war of attrition that they will likely lose. I see my investment, myself, SiriusXM, strong and unyielding, pushing forward and not losing steam while doing so. I see an enemy grasping at straws, jumping at every chance to point to caution in SiriusXM as weakness and scream of our demise so they may cover their short positions, or so they may re-enter with their cash after they have stolen the shares from a frightened long.
I see an enemy that a few months ago was proclaiming below $1 for SiriusXM, when today it is $2.15.
To this enemy I say I shall keep an eye on my investment, my army. Take care of and focus on yourself, for I know myself, and you, quite well.
"if you know your enemies and know yourself, you will not be imperiled in a hundred battles." Words to live by. Words to invest by.
Disclosure: I am long SIRI. I am long SIRI March $2 call options.