Short Sale Index: Bearish sentiment among short sellers reaches highest level in two decades

• Short sellers have been particularly aggressive lately, according to Ringgenberg’s Short Sale Index
• Pattern of index is similar to 2000 and 2008
• Ringgenberg: The probability that the stock market will fall in the next 12 months is significantly increased

Short sellers are more bearish than they have been in 20 years

As Barron’s explains in a report, short sellers are as bearish as they were when the dot-com bubble burst more than 20 years ago – and that signals poor prospects for the stock market in the coming year. While this sentiment is not shared by everyone, as some experts believe that a bullish trend occurs when bearish sentiment reaches extreme levels, Matthew Ringgenberg, a finance professor at the University of Utah, explained that this is the case, according to the news site People would be wrong when it comes to the impact of the amount of short sales on the overall market.

Ringgenberg’s Short Sale Index

In one study, he found that a “derivative” version of the short ratio was “arguably the strongest known predictor of total stock returns” over the following twelve months and outperformed all common indicators for predicting returns – such as the price-to-earnings ratio or the price-to-earnings ratio. Book value ratio. The short selling ratio is determined by dividing the number of shares currently sold short by the total number of shares outstanding. In the relevant study, Ringgenberg found that it was necessary to “detrend” this ratio, that is, to focus on the extent to which it is above or below an underlying trend. This is necessary due to secular trends in the volume of market-wide short selling, as traders alternately find it easier or more difficult to short stocks.

Ringgenberg’s derived short selling index is constructed so that its long-term average is equal to zero – a positive value means “abnormally high total short sales” and a negative value means “abnormally low total short sales”. The index jumped in September and increased even further in October, Barron’s reports. Although it declined slightly in November, the most recent reading of 3.03 suggests that short sellers are particularly aggressive because they believe lower prices are on the way.

Impact on the market in 2024

Ringgenberg himself told Barron’s that it wasn’t just the recent rise in his short-selling index that was concerning. He also said the index’s recent pattern was similar to the “sawtooth spikes” that occurred in 2000 and 2008, before the peak of short interest. While he acknowledged that it is difficult to predict market movements, the data suggests that “the likelihood that the stock market will fall over the next 12 months is significantly increased.”

However, according to Barron’s, Ringgenberg’s study not only suggests that investors should prepare for the possibility of lower prices in the coming year, but also challenges the assumption that short sellers are fundamentally unethical actors. This idea became particularly popular among some day traders during the meme stock rush of early 2021 that began with GameStop. While Ringgenberg doesn’t deny that some short sellers engage in questionable behavior, he argues that this should be assessed fairly. Currently, the short seller community views stocks as overvalued.

Editorial team finanzen.net

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