Schaeffer's Trading Floor Blog

If Short Interest is Slipping, Are We Due for Some Upside?

Sentiment indicators suggest a bullish turn could be coming

by 7/12/2012 1:01 PM
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Yeah, yeah…we've had a rough pullback over the past week. But overall, I still feel like this pullback is normal and healthy -- and that the bulls should get ready for another assault higher. One potentially extreme bullish indicator just went off, which is the fact that short interest has finally dipped. As I mentioned two weeks ago, short interest on all optionable stocks has been soaring higher since late April. In fact, it was up five straight periods and was at its highest point since early 2009.

Now we just had our first down tick in short interest, according to recently released data. What does this mean? Well, a large number of shorts is bullish because it suggests that there are a good deal of bearish bets out there. Nevertheless, once this rolls over from a high level, it could be a sign the shorts are covering, and that is what can provide the real buying power. Check out what happened the last time this ratio rolled over from a similar level back in September of last year. For those scoring at home, the S&P 500 Index (SPX) gained more than 30% over the coming months. Could this happen again? I don't like to give targets, but I sure would rather be bullish over the coming months than bearish.

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