A historical analysis of SPX's short interest and its implications for stocks
Short interest on current S&P 500 Index (SPX) stocks is close to its lowest level in over a year. This could have bearish implications for stocks, if it decreases the chance of a short-covering rally. The chart below shows short interest on S&P 500 stocks is below six billion shares, a rare occurrence. This week, I’ll quantify how stocks have performed at similar times to see if the numbers confirm our suspicion. I’ll also list out some stocks that go against this trend to see where we go to get exposure to a short-covering rally.
Aggregate Short Interest & Implications for Stocks
For the analysis below, I went back to 2010 and considered current S&P 500 stocks. I calculated the aggregate short interest each week and separated the dates based on the short interest. I defined low short interest as times it measured in the bottom 10% of its range over the past year. High short interest meant it was in the top 10% of its range. The tables below summarize how the S&P 500 Index performed going forward.
As we expected, low short interest has led to underperformance. Since 2010, when the short interest has been low relative to the preceding year, the S&P 500 has averaged a loss over the next month, with about 56% of the returns positive. When short interest has been high, increasing the potential for short covering, the index has gained an average of 3.07% over the next month with an impressive 82% of the returns positive. Stocks are missing a significant tailwind.
Here’s similar data, which instead looks at six-month returns. Again, the S&P 500 has underperformed when short interest is low like it is now. The index has averaged a 2.3% return over the next six months, with 61% of the returns positive. Otherwise, the index has gained on average over 6% with about 80% of the returns positive.
Stocks with Short Covering Potential
Short covering potential might be diminished for the market, but there are individual stocks where you can find it. The table below shows S&P 500 stocks in which the short interest is in the top 10% of its yearly range. Also, the stocks are positive on the year, so the short sellers might be feeling some pain now. If the short sellers give up, their covering could push the stock sharply higher.
