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Sears (NASDAQ:SHLD) has seen the most incredible short squeeze within S&P500 stocks this year, pushing the stock up 131.3% year-to-date even though the news surrounding the business has been nothing but horrendous, both due to the losses SHLD reported, and the ongoing executive exodus.

In fact, it's even reasonable to fear that Sears might end up bankrupt, and excluding its selling of profitable stores, it should again show massive losses when it reports the earnings for Q1 2012. Yet, as we've seen, the shorts were squeezed mercilessly. As short interest ballooned to more than 14 million shares when SHLD reported its problems with the Q4 2011 earnings, the stock was met with fierce buying interest, certainly helped by a market that did little but go up in a straight line.

However, for the last few days, we've seen a considerable loosening of the short squeeze vice. We got wind of the reason why - short interest as of March 15 had fallen to just 10.86 million shares, about the same as it was before the horrendous Q4 news back in December 2011. So the new shorts were basically routed, and it's likely that most of the remaining shorts are long-termers, just waiting for the end game.

Obviously, short interest being reported every 15 days is hardly a way to keep real-time tabs on what's happening. But this article will also let me introduce something else, a way for the trader to measure the short squeeze intensity on a day-to-day basis. We'll use SHLD as our example.

You see, when someone shorts stock, he has to borrow the stock to sell in the market, and when he borrows the stock, he has to pay a price that's set in a competitive market. If there's little stock available to borrow, that price will be higher, if there's more stock, lower. Also, when someone sells short a stock, he gets cash in return. This cash can be remunerated, with a part of the interest going towards the short seller as a rebate. This is the short rebate. The short rebate is thus the interest the short seller gets from the short sale cash, less the cost to borrow. Given that interest rates are very low, the cost to borrow more often than not exceeds the rebate, and thus, the short rebate is negative. This means the short seller has to pay an interest rate to keep his short position open.

In a stock like SHLD, in fact, the short rebate is very negative. This was part of what made the short squeeze so vicious - not only were there few shares available, but the few that there were were also incredibly expensive to keep. Naturally, many shorts could not take the heat from this combination, and thus the huge fall in short interest. Still, besides being painful for the shorts, this rate also presents useful information; basically when it's going up, it shows that the vice is getting tighter in the shorts' neck, and when it goes lower, it shows the vice is getting looser.

Given that the short rebate can be known daily, it represents information that's much more real time than the short interest itself, which is only reported fortnightly and with a 10 day delay. The table below shows how the short rebate evolved regarding SHLD:

As we can see, not only is short interest much lower now, but the cost of keeping a short position open is also plunging from an unbelievable 82.2% back in March 1. As such, finally the SHLD fundamentals can start taking over again, probably leading to another slide in the share price.

Disclosure: I am short (SHLD)

Addendum

Usually checking the short rebate is not easy for most traders, so I've set up a free tool whose only use is precisely to report the short rebate on any U.S. quoted ticker. You might want to bookmark it for further reference.

Source: The Sears Short Squeeze Is Loosening Up