Short squeezes arise when good news or buying by investors trigger a rush among short sellers to close out their positions.MARK BLINCH/Reuters
The surge in short interest during the first two weeks of January on the Toronto Stock Exchange carried over into the last two weeks of the month, according to the TSX's short-selling tables for Jan. 31. Sentiment on the Canadian stock market has become quite bearish, indeed.
Elevated levels of short selling may be seen by many as a bad omen for stock prices in months ahead. Or they could be viewed favourably by others since extremes in sentiment can foreshadow turning points.
Whatever the case, one thing seems likely: Price swings in stocks should be a lot more volatile until the bulls regain the upper hand and return the stock market to its long-term upward trajectory. We may also be entering a phase in which short squeezes (as discussed below) become more frequent.
iShares S&P/TSX 60 Index ETF
For a summary measure of the current pessimism, consider the short position in the iShares S&P/TSX 60 Index exchange-traded fund (XIU). During the two weeks ending Jan. 31, it leaped 27 per cent to 102.8 million units – a 52-week high. The number of units short is 17.8 per cent of XIU's float (freely trading units), compared with 10.8 per cent two months ago.
Hard times in the energy sector
Among companies with large jumps in short position, Anderson Energy Inc. stood out with more than a doubling to 18.9 million shares. The Calgary-based oil and gas developer provides a glimpse into how hard the plunge in oil prices has hit the junior echelons of the energy sector.
In the last quarter, Anderson's net income declined more than 1,000 per cent year over year, registering a loss of 20 cents per share. Over the past year, the firm's stock price declined more than 95 per cent, to 1 cent. On Jan. 31, the company retired a convertible debenture by issuing 9.1 billion shares to holders.
Short-squeeze candidates
Short squeezes tend to happen more often in markets in which short selling is rampant. Short squeezes arise when good news or buying by investors trigger a rush among short sellers to close out their positions (positions are closed by purchasing shares in the market and delivering them to the investors they borrowed shares from). This buying by short sellers may push up the price of a stock.
Short-squeeze candidates can be identified by the number of shares sold short as a percentage of the company's float on U.S. and Canadian exchanges. Companies with high readings (as of Jan. 15) included Lululemon Athletica Inc. (24.3 per cent), BlackBerry Ltd. (20.9 per cent) and Teck Resources Ltd. (19.4 per cent). The iShares S&P/TSX 60 Index ETF was also on the high side, at 17.8 per cent.
Candidates can also be identified by the ratio of short sales to the company's average daily trading volume (the days-to-cover or short interest ratio) on U.S. and Canadian exchanges.
Those with high readings (as of Jan. 15) included: CGI Group Inc. (26.3), Rogers Communications Inc. (24.6) and Canadian Imperial Bank of Commerce (21.3). Amaya Inc., the online-poker company, had a high ratio but the privatization bid launched by CEO David Baazov in early February may have already caused some short covering.
Precious metals: signs of short covering
There is increased interest in precious metals as a haven during these uncertain times, as highlighted by the recent 52-week high in Barrick Gold Corp.'s stock. The strength in this sector may be prompting short sellers to wind down their bets, at least going by the TSX short-interest tables.
The table showing the largest decreases in short interest as of Jan. 31 was well populated with gold miners. The big declines included New Gold Inc. ( down 43 per cent), Yamana Gold Inc. (29 per cent), Kinross Gold Corp. (15 per cent) and Eldorado Gold Corp. (9 per cent).
Short interest plummeted 99 per cent in Sprott Physical Gold Trust, a closed-end fund holding gold bullion.
Larry MacDonald is an economist, author and financial writer who blogs at larrymacdonald.serveblog.net/home.