One look at the first chart below, and U.S. equity bulls may have reason to salivate. Or maybe not. It can be a reason to worry as well.
NYSE Group short interest is through the roof. Literally.
By the end of September, short interest stood at 18.5 billion shares, and has gone parabolic since May this year – up 19-plus percent. As a reminder, the S&P 500 index peaked on May 20 at 2135.
The end-September short interest count is the second highest ever. The all-time high of 18.6 billion was recorded at the end of July 2008 (chart 1 below). Yes, 2008!
NYSE Short Interest 2007-2015
Looking at the Nasdaq Composite, the buildup is not as aggressive, but the trend is the same. The journey is from the lower left to the upper right. At 9.5 billion, short interest is up 16-plus percent since the end of December last year and is at the highest since the mid-September 2008 level of 10.1 billion. Once again, the last time short interest was this high was back in 2008 (see chart 2). And that was ominous for stocks.
Nasdaq Short Interest – 2007-2015
If – a big IF – stocks get another leg higher, as high as short interest is, this has the potential to cause a massive short squeeze. Especially if the S&P 500 index manages to rally past 2040-2050. That was major support until it was lost during the August sell-off (see chart 3 below). And a convincing breakout has potential to take out stops, and squeeze the shorts… and take the stock market indices higher.
Realistically, however, things may not quite pan out that way – at least near-term.
S&P 500 Chart –Â Technical Analysis
Stocks have rallied strongly since late September. Through intra-day high yesterday, the SPX rallied eight percent in 10 sessions. The short interest data in Charts 1 and 2 are as of end-September, so it is possible the latest rally probably caused some shorts to cover.
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