Portfolio Boss

Short Interest: The Misused Powerhouse of Market Prediction

Corona Del Mar, CA


Howdy Friend,


I came across a rather good paper this weekend as I contemplated what our next chess move for Portfolio Boss will be. This paper used short interest on all NYSE stocks (1973-2014) to see if it could be used in market timing.


It sure can!


In fact, high short interest in aggregate was more predictive than any of these other ideas by a country mile:


  • Log dividend-price ratio (DP): difference between the log of dividends and the log of prices.
  • Log dividend yield (DY): difference between the log of dividends and the log of lagged prices.
  • Log earnings-price ratio (EP): difference between the log of earnings and the log of prices.
  • Log dividend-payout ratio (DE): difference between the log of dividends and the log of earnings.
  • Excess stock return volatility (RVOL): computed using a 12-month moving standard deviation estimator.
  • Book-to-market ratio (BM): the ratio of book value to market value for DJIA.
  • Net equity expansion (NTIS): the ratio of 12-month
    moving sums of net issues by NYSE listed stocks divided by the total
    end-0f-year market capitalization of NYSE stocks.
  • Treasury bill rate (TBL): interest rate on a 3-month treasury bill.
  • Long-term yield (LTY): yield on long-term US government bonds.
  • Long-term return (LTR): return on long-term US government bonds.
  • Term Spread (TMS): difference between the long term yield on government bonds and treasury bills.
  • Default yield spread (DFY): difference between BAA and AAA-rated corporate bond yields.
  • Default return spread (DFR): difference between long-term corporate bond and long-term government bond returns.
  • Inflation (INFL): calculated from the CPI for all urban consumers.


// Quick aside: I found ALL the above studies sub-par compared to the stuff I know works. I've been hammering home the fact that almost everything you hear about market timing and economic prediction is garbage. Read the list again and let it sink in. //


Isn't it ironic how traders are always talking about "short squeezes" when that's the exception rather than the norm?


This chart below shows how high short interest predicts lower prices 70% of the time.


So all that meme stock crap was a fad.

Let's take a look at my "Trade of the Year" and use "days to cover" as an example.


Days to cover is a metric that estimates how long it would take all short sellers to close out their open positions if those short sellers were to buy the stock on the open market. My trade of the year (short Pfizer, long Boston Scientific) is based on Ed Dowd's hypothesis that the warp speed jabs were bad and cause heart problems (among others).


The numbers have been showing up in insurance actuary tables as 5-sigma events. I will also observe that McKinsey & Co is predicting 50% unemployment by 2030 due to automation, and Social Security is predicted to run out in 2033.  Anyhoo...let's continue before I go down THAT rabbit hole.


Pretty much all the jab companies have been falling apart. There are notable short positions on NVAX, JNJ, MRNA. Surprisingly not too many Pfizer (PFE) shorts as its price sits at a multi-year low.

Check out the days to cover short positions:

Just to reiterate: Short sellers are generally Smart Money.


They aren't always right, but they manage to get it right most of the time. I do find it silly that some hedge funds put themselves at unlimited risk short selling smaller cap companies (i.e Melvin Capital which was founded by Gabe Plotkin).


They even made a movie about it called Dumb Money: 



I would only consider selling short ETFs and the largest market cap stocks. Asymmetrical risk is no joke: And is why I'm 100% sold on multi-strategy trading. On the opposite end of the spectrum, we have Boston Scientific. They make heart equipment. Notice very little short selling going on.

So what's next?


We're uploading short data into The Boss for a quantifiable verdict. This kind of research used to take years. Now it happens in a matter of hours as The Boss will discover relationships I would never think of. I'll let you know what I find.


In the mean time, check out The Boss on Twitter:



Trade smart,

Dan "Prince of Proof" Murphy


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