Courtesy of The Pragmatic Capitalist
Much of the fuel for the 50% rally in the S&P 500 has come from short covering. The general skepticism surrounding the recovery has actually resulted in price gains. But as the rally gets long in the tooth we could be seeing signs that short covering will have a much smaller impact. Bespoke Investment Group reports:
Following July’s leg higher, it seems that traders on the short side have cut and run. As shown in the chart below, the average stock in the S&P 500 had 4.97% of its float sold short as of the end of July. This is the lowest level since January 30th, and marks a decline of 17% from the peak levels in July 2008. Bears will cite this number as proof that investors are crowded on the long side. While bulls would probably prefer to see higher levels of short interest, they are likely to note that short interest still remains high from a longer-term perspective.