Many investors are using the short interest ratio as a tool to determine the sentiment of a stock or the market. The short interest is the number of shares currently borrowed by short sellers for sale, but not yet returned to the owner (lender).
Every short seller anticipates a declining stock market. A profit is made if the stock is bought back at a lower price than when it was sold short. When a large amount of short selling activity is occurring, market participants obviously expect prices to head lower. Short sellers are potential buyers sooner or later and represent a lot of buying power when they have to scramble for cover in a sudden market turn.
The reasoning behind this is that the short positions must eventually be covered, which means that there will be more purchasers of the stock who in turn drive the price up. If a stock's price begins to rise significantly, investors who have short sold the stock will quickly begin to close out their positions (by purchasing shares off the open market), creating buying pressure for the stock and driving the price up even more.
If a previously lagging stock turns very bullish, the buying action of short sellers can result in extra upward momentum and increased losses for short sellers who are slow to close out their positions. However, while a high short interest ratio can lead to high gains in the short-term perspective, this ratio does not provide any information about a sustainable appreciation in the underlying stock price!
Listed below are ten companies that have the highest short interest ratio according to the latest bi-monthly short interest data released by AMEX, NASDAQ and NYSE.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.