Short Selling

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: Keep Reading

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: Keep Reading

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: Keep Reading

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?” Keep Reading

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: Keep Reading

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: Keep Reading

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: Keep Reading

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?” Keep Reading

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?” Keep Reading

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: Keep Reading