Potential Market Negatives Part 2: Shorts

For the next part of my ‘Potential Market Negative’ series I wanted to take a look at short interest on the NYSE.  This summer’s rally has begun squeezing out a good number of shorts from the market, reducing the  short interest on the NYSE to around 14bn shares in July from over 16bn shares in March.  On its own this would be considered a relatively bullish indicator.  But, given the near record level of shorts, short covering has likely played a meaningful role in the recent rally, as those holding the positions were forced to cover.   At the same time,  given enough downward momentum or negative news we could see shorts re-enter the market driving down equity prices even further.  Therefore, it will be important to monitor short interest and the effect it may have on the market over the weeks ahead as it could act as another potential downward catalyst.