Today's Rally Not a Short Covering Rally

The rally from the January lows to early February was due largely in part to short covering. With that in mind, we checked to see if today's rally was being led by the most heavily shorted stocks. Surprisingly, today's gains are being led by stocks that have the smallest amount of short interest as a percentage of float, while the most heavily shorted stocks are up the least. Either the shorts are holding strong on their positions or they don't have nearly as much to cover as they did earlier in the month.

In the chart below, we broke up the Russell 1,000 into deciles (ten deciles of 100 stocks) based on short interest as a percentage of float. We then calculated the average percent change on the day of stocks in each decile. As shown, the decile of the most heavily shorted stocks is only up an average of 0.42%.

click to enlarge

Comments

[kkin365:]

Excellent analysis, very insightful. I presume all 1000 or 2000 stocks in Russell are listed. Reading one of an ETF's prospectus, I noted that many are so small (with perhaps less than 100 shares in an ETF's portfolio) I doubt that there are many short sellers around in the lower half of 1000 or 2000.

2008 Feb 13 09:49 AM