Another new report and another move lower in short interest. As I've noted over the past few weeks, the overall trend in total short interest on all optionable equities (about 2,600) has peaked and is moving lower.
Our theory is that increasing short interest can act as a headwind to any rallies, but once the shorts begin to cover, it can be very bullish. In fact, I mentioned this on Bloomberg TV recently as a big reason why I'm bullish.
As I've said before, the last time short interest was this high and rolled over, it sparked a 30% rally in about five months. Well, it dipped yet again, but not by much – only 0.18%. Sure, that isn't much, but check out the overall trend. It looks like short interest has peaked, and as long as it keeps moving lower, this is another bullish tailwind.
Taking a look at the data over a wider period of time, you can see that this has a pretty nice track record. Higher short interest is bearish, while decreasing short interest is bullish. It may seem rather simplistic, but as long as this trend stays lower, I think siding with the bulls makes sense.
Mid-Caps Nearing a Triple of March 2009 Lows
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