Indicator of the Week: Implications of the S&P Short Interest Spike

Short interest on SPX component stocks is at multi-year-high levels

Senior Quantitative Analyst
Oct 21, 2015 at 6:13 AM
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Short interest has spiked over the past few months on stocks that make up the S&P 500 Index (SPX). The chart below shows total short interest for S&P stocks went from below 7 billion shares to about 8.3 billion shares, an increase of 19%. This week, I'll take a look at the potential implications of this spike, and see exactly what stocks are contributing to the rise. 

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Most Short Interest Since Crash: Below is a chart showing the short interest-to-float ratio on SPX components, going back to 2006. The current level, 2.77%, is the highest since late 2009, when the benchmark was falling from the short interest spike during the financial crash. One troubling observation is that the short interest spiked higher to about the same level in mid-2007, just before the crash. A more pleasant observation is that the spike in 2011 wasn't too far from the current level in short interest, and that spike marked the beginning of a fast snap-back rally.

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Short Interest Gains on Stocks: The stocks below are the ones making the biggest contribution to the spike in the chart above. Dow Chemical Co (NYSE:DOW) has seen a 346% spike in its short interest since mid-August. That stock accounted for almost 5% of the total S&P 500 short interest gain. Those short sellers are currently losing money, as the stock is up 5.55%. Freeport-McMoRan Inc (NYSE:FCX) short interest is up about 74%. Those short sellers are really feeling the pain, as the stock is up nearly 20%. At some point, the shorts may have to cover their positions, making these stocks and some others on the list susceptible to a short-covering rally.

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