Finance professor Matthew Ringgenberg and his team have developed a short-sale index that is “the strongest known predictor of aggregate stock returns,” according to their research published in the Journal of Financial Economics.
The index collects short sales across securities and calculates the percentage of outstanding shares sold short at the market level.
The version based on raw data shows an uptick in short interest to 4.6 per cent around the time COVID-19 first ramped up, back in March. The index has since settled back to 4.3 per cent, as of November.
By comparison, it trended upward to 9 per cent just prior to the big stock-market crash of 2008. These results pertain to the U.S. stock market but should still be of interest to Canadian investors given the correlation between U.S. and Canadian stocks.
The other two versions of the index show how far short interest deviates from the mean, after adjusting out secular trends tied to extraneous factors, such as growth in the hedge-fund sector. To this end, the first version linearly detrends the short sales data and the second detrends with a quadratic cube function (i.e. raised to the third power). They provide mixed readings, with the first trending below its mean (not bearish) and the second trending moderately above (bearish).
So, it’s a wash.
“Overall, the data shows that short sellers are not really active right now,” Professor Ringgenberg told the Globe and Mail. “They haven’t completely exited the market, but they are not acting as bearish as they were in 2008.”
Canadian stocks targeted by short sellers
Five companies have short interest exceeding $900 million and 5 per cent of float, as of Dec. 21.
Westshore Terminals Investment Corp., a coal exporting terminal on the B.C. coast, now has the second highest percentage of float short (the highest, Alpha Pro Tech, has been covered in previous updates). Coal prices are rallying but Westshore’s union recently issued a strike notice and its main customer, Teck Resources Ltd., is building their own terminal.
The banks dominate the top 5 companies with the largest dollar increases in short sales.
Gold mining companies dominate the top 5 companies having the largest dollar decreases in short interest over the month ending Dec. 21.
S3 Partners recently reported on short interest in cannabis stocks. They find that bearish stances are considerably diminished in 2020. Sector short interest dropped to 17.0 per cent from 24.2 per cent of float; loan rates tumbled to 5 per cent from 30.4 per cent. Canopy Growth Corp., Aphria Inc. and Tilray Inc. had the biggest declines in bearish sentiment.
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