Short interest in the stock market has dropped recently, adding a little risk in the near-term.
The average company in the
index recently had about 3.5% of its total shares outstanding shorted, according to
That is down from about 4.2% just months ago, a multiyear peak.
Shorting means that a trader borrows someone else’s shares to sell them immediately, in hopes of buying them back and returning them months later at a lower price. When the number of shorted shares declines, it means short sellers have bought back shares because they are afraid stocks will keep running higher.
The quick translation: There has recently been money betting on stocks rather than against them.
The buying activity has now sent the stock market to lofty levels. The Russell 2000 is up about 14% since the end of September, when the index hit a low point, a time frame that coincides with the decreasing level of short positioning.
A few factors have driven buyers into the market, the primary one being a declining rate of inflation, which signals that the Federal Reserve could be close to finished increasing interest rates. Also, corporate earnings results have surpassed analyst expectations.
That sets the market up for potential disappointment. With more money moving into stocks—and pushing them higher—there may be a dearth of buyers at moments in the next few months, especially as the market’s hopes may not become reality quite yet.
Several risks remain. The Fed announces its interest rate decision Wednesday, and there is a solid chance it could signal more rate increases are warranted, as inflation is still above 6%, while the Fed’s goal is 2%. There is also risk to companies’ future earnings, as the economic fallout of higher rates is still working itself through the economy.
Watch out for any rallies to get shorted once again.
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