Aggregate Short Interest as a Stock Market Indicator

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…)