PUBLIC SHORT RATIO

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APPLICABLE TIME FRAME(S):  

INTERMEDIATE

 

UPDATE SCHEDULE:

Each Saturday morning by 11:00 AM EST

 

REPORTING DELAYS:

Two weeks, so the most recent update will be at least two weeks old.

 

EXPLANATION:

All stocks traded on the New York Stock Exchange (NYSE) are handled through what is called a "specialist".  Every stock traded on the NYSE has a specialist assigned to it (see www.nyse.com for more information).  A specialist has one main job to do - maintain a fair and orderly market for the stock(s) in which they make a market. 

 

To do this, they match and maintain incoming orders, and when there is an imbalance of orders, they are obligated to buy or sell (or sell short) from their own account in order to avoid wild swings in the price of a stock when possible.  Due to their position as "the" market maker for some of the largest, most well-known companies in America (many of which make up large parts of the Dow Jones Industrial Average and S&P 500), these traders have some of the best information available when it comes to order flow and demand (or lack thereof) for shares of stock. 

 

Every week, the NYSE releases information about short sales initiated by their specialists and members, as well as short sales made by the public.  The data is released with a two-week delay, so by the time we are able to analyze it, it is already somewhat stale. 

 

The graph below is an excerpt from Barron's website, where this information is made available each week.  This particular data was released on Saturday, February 22nd, 2003.  We can see that the most current data is for February 7th - thus the two-week delay as discussed earlier. 

 

This table lays out the amount of short sales made by the Public, NYSE Members and Specialists.  Since specialists are also NYSE Members, their short activity is included in the "Member" category.  Therefore, the "Total" is calculated by adding up the short sales made by the Public and Members (i.e.  468,479 + 425,055 = 893,534).

 

 

 

When the public (i.e. non-NYSE members) is shorting stock heavily, then they will make up a larger portion of all shorts initiated during the reporting period and the Public Short Ratio will rise.

 

Typically, when the public wants to short a lot of stock, that is when we would want to buy.  Conversely, when there is heavy public demand to own stock, the specialists may be forced to short that stock to them in order to maintain an orderly market, so the specialists would then make up a greater percentage of total short sales and the Public Short Ratio will drop. 

 

When the public wants to own so much stock that the specialists have to (or want to) short a large amount to them, then we should be wary of a possible market downturn.

 

GUIDELINES:

There has been a general increase in public shorting over time.  The main reasons are the increase in hedge funds that focus exclusively (or mainly) on shorting equities, and the increasing ease with which individual investors have access to shorting stocks through the rise of online brokers. 

 

Therefore, the levels of the Public Short Ratio which could be considered extreme have changed in the last few years, so to compensate we use Bollinger Bands around the indicator on the chart so that the extremes change over time along with the data.

STATS:

  Since 1943 Since 2000
Mean 29% 47%
St. Dev.* 11% 4%
Maximum 68% 68%
Minimum 4% 35%

 

*Standard Deviation.  See below...

 

68% of readings (1 standard deviation) should be between 43% and 51%

95% of readings (2 standard deviations) should be between 39% and 55%

99% of readings (3 standard deviations) should be between 35% and 59%

 

ADDITIONAL RESOURCES:

New York Stock Exchange (www.nyse.com)

 


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