June ETF Short Interest Surges

The newly released short interest for June does offer some hope for the bulls. This month's short interest reflects some large surges in short interest in a number of the ETFs we watch closely. Most investors are aware of the implications of short interest from a contrarian's point of view. For those unfamiliar, its simple. Short interest represents bearish bets on stocks, thus the higher the short interest, the more pessimistic the market's outlook on an issue has become. From a contrarian standpoint, high short interest is good for a stock as it represents the "wall of worry" that stocks typically climb.

That said, our review of the newly released short interest data identified some pessimism on a few ETFs that should be on every investor's radar screen.

First, the Short interest on the S&P 500 Index, or "Spiders". June short interest for the SPY shares rose sharply by 27 percent. This is the largest increase in short interest on the SPY since three months ago in March when short interest on the shares added 33 percent. Looking over the last two years (you can acquire this data free or for a small fee online), these are the two largest jumps in short interest over the last two years.

It is our experience (and that of our testing) that large spikes in short interest on the SPY occur at points where the market has endured some rapid selling and is preparing to advance. By our memory, this is the first time that the shares have seen an increase of this magnitude while the shares were marking relatively new highs.

The implications for the market are assumed to be positive if history is any indication, though it does not excuse the market from the potential for short-term selling pressure. This does however bode well for the intermediate-term outlooks as it is not too often that the short selling crowd nails a market top with a surge in short interest similar to June's

In addition to the jump in the SPY short interest a few other ETFs also saw significant increases in their short positions. The table below identifies the ETFs that trade on the NYSE and AMEX with their respective June short interest data. Note that SPDR Utilities (XLU), First Trust Dow Jones Index (FDN), Holdrs Telecom (TTH), Holdrs Software (SWH) and Holdrs Utilities (UTH) shares all saw significant increases. The contrarians in the crowd will likely be watching these shares.

Comments

[mavericks]

According to ETFconnect.com, there are 476,300,000 shares of the SPY. If there are 197,400,000 shares short then that represents 41.4% of the outstanding shares. That is a huge percentage though the question is how that compares historically.