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Short Interest and Short Sales Notes
In a stock that has an upward price trend like FNMA as well as price volatility due to market participants sensitivity to positive and negative news about the uncertain future status of the GSEs, short interest and short sales have to do with short term momentum increases or decreases in share price.
A short sale is a bet against a price increase and an anticipation of a price decrease. Short sellers who have an open position are those that did not cover their short sale by buying an equivalent number of shares of the borrowed stock. Short sellers make money when they buy shares below the price they sold borrowed shares.
Short sellers lose money when the stock price increases above the sold price and they buy at a higher price than they sold for a loss.
This is simply the reverse of those opening a long position. Longs buy low, sell high. Shorts sell high, buy low.
However, losses on a short position are theoretically infinite because there is no zero or ending point for price increases.
An increase in short sales indicates the number of shares that were borrowed and sold in the hope that that price will go down. Short sales numbers do not tell us how many short sale positions are still open and how many have been closed or covered. It does give an indication of one aspect of total market sentiment that seeks lower share prices vs. higher share prices.
An increase in short interest indicates the increase in the number of short positions sold and that have been settled on the buyers side. These numbers indicate the number shares that need to be bought in order to cover the short sellers still open short position. That is, the short seller who does own shares of a particular stock, "borrows" shares of stock from a broker/dealer, and sells these borrowed shares to others. The broker/dealer settles or delivers the borrowed stock to the buyer and then seeks to even the account by getting those numbers of shares back when the short sellers buys the shares to cover.
The days to cover statistic indicates the number of days it would take to a short seller to cover the open position. An increase in days to cover indicates that number of shares available to cover short positions is increasing and making it difficult for short sellers to close their open short positions.
A decrease in short interest means that open short positions are being reduced by short sellers covering to take gains, avoid losses, or to prevent further losses. The short sellers are finding not worthwhile their time and money to make short bets.
A short squeeze occurs when there is an inordinate number of days to cover and a large increase and volume of short interest and a positive catalyst that spurs an increase in share price as a gap up or a sudden, unanticipated buyer interest. As the price rises and short sellers lose money, they attempt to buy into the buying spurt when there are not enough shares to go around and the price rises dramatically for a duration as short sellers and long buyers buy shares.
If the catalyst was temporary good news and not a significant positive change in the overall value or company structure, the price will descend again and the process of shorting will also continue.
Short sellers/traders day trade as do those long buyers. In this sense, opening a long position means going for an increase in price. It does not mean a long term investor who is not concerned about intraday, day, and short term gains, but focused on returns from long term upward trends.
Finally, Unlike short sales that are reported every day, short interest is reported every two weeks or semi-monthly. Hence two tables, one for short interest and one for short sales.
