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Bear swarm: 'Short selling' of NYSE stocks highest since March 2009

September 26, 2011 |  4:37 pm

Yet another sign of how the bears have piled-on in the stock market: “Short interest” -- the number of shares borrowed and sold, typically in a bet that prices will drop -- jumped in mid-September to the highest level since March 2009, according to New York Stock Exchange data reported Monday.

Total NYSE short interest was 15.69 billion shares as of Sept. 15, up 5.4% from the end of August and up nearly 18% from the end of July, when the market’s summer breakdown began.

The latest figure is the largest short-interest total since 16.17 billion shares were shorted in March 2009. That, of course, was the month stock prices bottomed after the crash of late-2008 and early-2009. As it turned out, it was exactly the wrong time to be betting on, or hedging against, a further drop in prices.

On the Nasdaq market, short interest rose to 7.86 billion shares as of Sept. 15, up 4.2% from the end of August and the highest since September 2010, when the market began to surge after slumping for much of that summer.

In a short sale, a trader borrows stock (usually from a brokerage’s inventory) and sells it in the open market. The bet is that the market price of the stock eventually will drop, allowing the seller to buy shares at a lower price, repay the borrowed stock, and pocket the difference between the sale price and the repurchase price.

If, however, the stock’s market price rises instead of falling after the short sale, the seller will be in the red -- and his losses will mount until he closes out the transaction by replacing the borrowed shares.

That’s one reason a jump in short selling often is viewed as a "contrarian" indicator for the  market, meaning a sign that share prices may be nearing a bottom: If stocks begin to rally, short sellers can help feed the turnaround if they rush to buy shares to replace what they’ve borrowed.

After reaching 16.17 billion shares in March 2009, NYSE short interest tumbled to 13.52 billion shares by the end of September of that year, as the Dow Jones industrial average rallied from its low of 6,547 in March to 9,712 by Sept. 30.

Rising pessimism among market newsletter editors also is viewed as a contrarian indicator. Two weeks ago the newsletters were more bearish on stocks than at any time since March 2009.

That didn't stop the Dow from tumbling again last week, but the market has been able to stay above its early-August lows.


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-- Tom Petruno

Photo credit: Associated Press