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Short Interest Pullback Could be a Bullish Sign

Why it may pay to be mindful of the short-interest trend

by 7/26/2012 12:21:50 PM
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The trend in short interest continues to support the bullish case. As was noted two weeks ago, total short interest on all optionable equities (about 2,600 names) rose above the September peak and started to roll over.

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, Todd talked about this on FOX Business Network earlier this week. And I mentioned to Matt Nesto on Yahoo! Finance's "Breakout" that the huge short interest could be another bullish factor for a summer rally.

Considering short interest levels were recently near the same area that preceded a 30% rally over six months, it pays to pay attention to what this indicator is doing. Well, the recent data is out and short interest dropped another 0.42% on top of the more than 3% drop two weeks ago.



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On a longer-term timeframe, you can see how previous spikes in short interest have been rather bearish, while rollovers have been nice times to get long. So far, so good for the bulls.



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