Short Selling
Are there reliable paths to success in short selling? Is short selling activity a useful indicator for investors/traders? Does it mean “stay away” or “squeeze coming?” These blog entries cover the short side of the market.
Exploitability of Monthly Short Interest for Individual Stocks March 2, 2011
Do highly shorted stocks tend to underperform? If so, is this underperformance exploitable? In the February 2011 draft of their paper entitled “Short Sale Return Predictability Revisited: Anomaly or Return Mis-measurement?”, Zsuzsa Huszár and Wenlan Qian investigate the sources of negative returns associated with stocks that have high levels of short interest. They use short interest ratio (SIR) to measure level of short interest. They compare portfolios matched for size, book-to-market ratio and six-month momentum to isolate the effects of short interest level. Using monthly short interest levels, shares outstanding, institutional ownership, analyst forecasts, firm fundamentals, returns, trading volumes and (as available) stock lending data for a broad sample of NYSE-AMEX and NASDAQ stocks over the period January 2004 through December 2008 (60 months), they find that: More…
Aggregate Short Interest as a Stock Market Indicator February 17, 2011
Does aggregate short interest serve as an intermediate-term stock market indicator based on either momentum (with an increase/decrease in aggregate short interest signaling a continuing stock market decline/advance) or reversion (with an increase/decrease in aggregate short interest signaling a stock market advance/decline)? To investigate, we compare the behavior of NYSE aggregate short interest with that of the the NYSE Composite Index). The NYSE has measured aggregate short interest monthly (as of the middles of months) through August 2007 and approximately biweekly (as of the middles and ends of months) since. There is a delay of about two weeks between measurement date and publication date. Using monthly/biweekly short interest data culled from NYSE news releases and contemporaneous NYSE Composite Index level/volume data for the period January 2002 through January 2011 (69 monthly followed by 81 biweekly observations), we find that: More…
Is Buying Just-delisted Stocks a Profitable Strategy? February 27, 2010
A reader asked: “I read a few papers that suggest buying delisted stocks when they begin trading OTC is a profitable strategy. Do you have any evidence to support this claim?” More…
Important News Releases for Short Sellers February 4, 2010
How do short sellers gain an informational advantage over other traders? On what news do they focus? Do they anticipate or react to news? In their January 2010 paper entitled “How are Shorts Informed? Short Sellers, News, and Information Processing”, Joseph Engelberg, Adam Reed and Matthew Ringgenberg combine detailed data on short selling with data on news releases to investigate how short sellers use news. Using detailed information on short sales (daily short volume divided by total volume) for a broad sample of stocks and relevant news releases spanning January 3, 2005 through July 6, 2007, they conclude that: More…
Timothy Sykes: Penny Stock Pump-and-Dump Detective? January 26, 2010
A reader requested a review of the trading methodology presented at TimothySykes.com (“Short Selling Penny Stocks”), which essentially uses price-volume analyses in attempts to detect in real time penny stocks being pumped and ride the ensuing downside (dump). Timothy Sykes, author of the An American Hedge Fund, is a former hedge fund manager and founder of BullShip Press LLC. His bio states: “Since the beginning of 2008, Timothy has been the #1 trader/investor, out of 25,000+ on Covestor.com.” Using the record of 296 trades spanning 2/1/08 through 1/22/10 (including those previously posted for October 2009, but now missing) and some recent clarifications from Timothy Sykes, we find that: More…
Is Phil Erlanger’s Research Exploitable? January 12, 2010
A reader asked about Phil Erlanger Research: the Art of the Squeeze Play for institutional investors, which offers “research focused on delivering…advanced technical and sentiment research and data,” and the companion Erlanger Squeeze Play for private investors, which identifies “short-term trading opportunities in both long and short squeeze plays.” The core elements of this research are “short intensity and technical strength.” The performance data on the two sites are identical, but more up to date at Phil Erlanger Research. Should investors expect that portfolios built on this research will substantially outperform the market? Based on weekly self-reported performance data and contemporaneous weekly data for S&P Depository Receipts (SPY) spanning 3/8/02 through 10/9/09, we find that: More…
Ways to Exploit ex-Dividend Effects? September 26, 2009
A reader asked: “I am under the impression that stocks usually drop by the amount of the dividend on the ex-dividend day. Is this true…or more precisely, how true is this? If it is true, couldn’t one just short the stock on that day? If it is not true, could you just hold the stock for that day and reap the dividend? Also, could options be used to make some profits on this? Selling calls or buying puts?” More…
Any Shorting Methods that Beat Buy-and-hold? September 10, 2009
A reader asked: “I have never heard of a shorting method that outperforms bonds or stocks over a horizon of greater than 5 years. Do you know of any?” More…
Long Play When Shorts Are Away? May 26, 2009
The conventional wisdom is that short sellers are on average more informed than other traders, and high levels of short interest in a stock indicate poor future returns. Is the converse true? Do short sellers stay away from good stocks? In the May 2009 version of their paper entitled “The Good News in Short Interest”, Ekkehart Boehmer, Zsuzsa Huszar and Bradford Jordan investigate whether the absence of short selling is informative about future returns. They base their investigation on three lightly (heavily) shorted portfolios that include stocks from the 1st, 5th and 10th (90th, 95th and 99th) percentiles of monthly short interest ratios (SIR), along with three related long-short portfolios. Using monthly short interest, returns and firm characteristics for NYSE, AMEX, and NASDAQ stocks from 1988 to 2005 (930,109 stock-month observations), they conclude that: More…
Combining Short Interest and Analyst Recommendations October 22, 2008
Are short sellers and expert equity analysts generally in synch or out of synch? What does it mean when short sellers and analysts disagree? In their September 2008 paper entitled “Trading Against the Prophets: Using Short Interest to Profit from Analyst Recommendations”, Michael Drake, Lynn Rees and Edward Swanson investigate whether investors/traders can earn abnormal returns by trading on information provided by expert sell-side analysts (recommendations and recommendation changes) and short sellers (short interest). In their tests, they rebalance portfolios quarterly, hold for six months and adjust returns for firm size. Using a large sample of quarterly return, short interest and analyst recommendation data for the period 1994-2006 period, they conclude that: More…
