Stock performance based on short interest

April 19, 2009

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There’s no question we’re in a short-covering "crap" rally, but when will it end? – Ilene

Stock performance based on short interest

Courtesy of Prieur du Plessis at Investment Postcards from Cape Town

Bespoke brought an interesting research study on short positions to our attention earlier this week, as reported below.

“Since the S&P 500 bottomed on March 9, the average stock in the index has rallied by 41.2%. However, as Bank of America (BAC), Citigroup (C), and other names have shown, many companies have done considerably better, with gains of over 100%.

“One factor which has been a key driver of stock performance off the lows has been a stock’s short interest as a percentage of float. In the chart below, we have grouped the stocks of the S&P 500 into deciles based on their short interest as of the end of February (which was the most recent available data as of the March lows). We then calculated the average return of the stocks in each group from March 9 through April 13.

“As shown in the chart, the five deciles with the highest short interest as a percentage of float at the end of February have all outperformed the average overall return, while the five deciles with the lowest short interest have all underperformed.

“Skeptics of the market’s rally would point to these results and say that the current rally is nothing more than a short-covering one. However, going back to the 2002 lows, every rally (whether real or a head fake) started off in a similar fashion.”