Short Selling

Analyses in “Shorting VXX with Crash Protection” suggest that one-month momentum may be a useful signal for trading in and out of a short position in iPath S&P 500 VIX Short-Term Futures ETN (VXX). A subscriber inquired whether a short-term version of this signal is effective. Specifically, how useful is a strategy that goes short VXX (to cash) at the close when the same-day VXX return is negative (positive)? To test this daily momentum signal, we consider basic daily return statistics and two VXX shorting scenarios: (1) shorting an initial amount of VXX and letting this position ride indefinitely (Let It Ride); and, (2) shorting a fixed amount of VXX and resetting this fixed position daily (Fixed Reset). For tractability, we ignore shorting costs/fees, but we do consider the trading frictions associated with entering and exiting a short position in VXX based on the daily momentum signal. Using daily reverse split-adjusted closing prices for VXX from the end of January 2009 through mid-April 2013, we find that: More…

Prior research indicates that individual stocks with high short interest relative to shares outstanding (short interest ratio) tend to underperform. Do this finding hold for exchange-traded funds (ETF)? In their December 2012 paper entitled “Why Does ETF Short Selling Provide a Different Signal?”, Christopher Hughen and Xiaoyu Ma investigate whether short interest ratio metrics predict future returns for ETFs. Their return measurement interval is from one mid-month short position settlement date (15th day of each month or the preceding business day) to the next. They define abnormal monthly return as ETF return minus the MSCI World Index return. Using so specified monthly short interest and total return data for 21 iShares single-country funds trading as of February 2002 from inception through December 2011 (3,419 fund-months), they find that: More…

“Shorting Leveraged ETF Pairs” looks at shorting leveraged long/short pairs of exchange-traded funds (ETF) and letting the short positions “melt away” over long holding periods. Findings suggest that the approach may be profitable, with most of the gain coming when market volatility is high. What about more active strategies of continually renewed short positions? To investigate, we consider monthly renewal of short positions in the ProShares Ultra S&P500 (SSO) / ProShares UltraShort S&P500 (SDS) 2X/-2X pair and the ProShares UltraPro S&P500 (UPRO) / ProShares UltraPro Short S&P500 (SPXU) 3X/-3X pair. Using monthly adjusted closes for these ETFs and for the S&P 500 Volatility Index (VIX) from respective inceptions through November 2012, we find that: More…

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 SPDR S&P 500 (SPY). 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 release date, and new releases sometimes revise prior releases. Using monthly/biweekly short interest data culled from NYSE news releases and contemporaneous dividend-adjusted SPY price for the period January 2002 through July 2012 (69 monthly followed by 115 biweekly observations), we find that: More…

What are typical magnitude and duration of short squeezes? In their March 2012 paper entitled “Short Squeeze”, Wei Xu and Baixiao Liu investigate the dynamics and determinants of short squeezes. They cite the SEC definition: “The term ‘short squeeze’ refers to the pressure on short sellers to cover their positions as a result of sharp price increases or difficulty in borrowing the security the sellers short. The rush by short sellers to cover produces additional upward pressure on the price of the stock, which then can cause an even greater squeeze.” They identify short squeeze triggers as one-day stock returns (Day 0) of at least 15%. They interpret the Day 1 reversal as the magnitude of the short squeeze. They define lagged short interest level as the ratio of the number of shares shorted as of the 12th of each month to trading volume the previous month. Using daily and 5-minute intraday stock prices and monthly short interest levels for common stocks listed listed on NYSE/AMEX/NASDAQ as of 2003, excluding very small and low-priced stocks, during 1995 through 2009 (containing 26,343 short-squeeze events), they find that: More…

Studies of leveraged exchange-traded funds (ETF), such as those summarized in “The Unintended Characteristics of Leveraged and Inverse ETFs” and “The Performance of Leveraged ETFs over Extended Holding Periods”, find that the frequent rebalancing actions necessary to maintain targeted leverage substantially affect long-term performance. A reader observed:

“I’ve read so many articles about how the leveraged ETFs are screwy, and they chew up both sides of the market due to their rebalancing, etc. So I’ve been shorting equal amounts of the long and short double ETFs. I’m short the QID and the QLD, short the TWM and UWM, short the UGL and the GLL, and short the DIG and DUG. I figure, if they are bad longs, they must be good shorts. My thinking is that in a STRONGLY trending market, the position may lose some ground, at least temporarily. But in a weakly trending market, or sideways, both will decay nicely. When I look back on the ones that are a few years old, they just melt away (one side more than the other).”

Does this reverse thinking work? To check, we examine the inception-to-date performance of paired short positions for Ultra S&P500 ProShares (SSO) / UltraShort S&P500 ProShares (SDS) and Ultra QQQ ProShares (QLD) / UltraShort QQQ ProShares (QID). Using daily adjusted closes for these 2X and -2X ETFs for the period 7/13/06 (the first date prices for all four are available) through 10/13/11 (about 63 months), we find that: More…

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…

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…

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…

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…