Question: I read with interest each week your “Stock Shorted” report but have trouble assessing just what the impact is of the levels of shorting being experienced. Intuitively, it seems that a level of shorting around 10% to 20% would be disastrous for a stock, as it would really disturb the balance of trades – but it doesn’t seem to be so. Myer, for example, has 13% shares shorted but its price does not, to me, seem unduly impacted.
Answer (by Paul Rickard): The value of the information is that it tells you that at least one group of investors is fairly convinced that the stock is overpriced – either on a gross basis and/or relative basis. Often, these investors are the more nimble hedge or long/short funds, and the investment banks.
Short positions over 10% are pretty high. The sustainability really depends on the ability of the shorters to borrow the stock. If the share register is pretty open and shorters can make long term borrowing arrangements, these sorts of positions can be sustained for many months. If the share register is tightly held, shorters become vulnerable to the classic “short squeeze” – meaning that these positions are not sustainable and the price of the stock can go up very quickly as shorts cover their positions.
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- Penny Pryor: Buy, Sell, Hold – what the brokers say [2]
- Ron Bewley: Why I’m changing my sector allocation [3]
- Penny Pryor: Short n’ Sweet – IPO watch [4]
- Tony Negline: Don’t let inflation be a distraction [5]
- Paul Rickard: NAB’s new hybrid security [6]
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