Many commentators have ascribed the recent move in the market to a change in sentiment by investors, fed by recent positive economic news that indicated that the economy has stopped contracting and may be entering an expansion phase late in 2009 or early 2010.

IN PICTURES: Eight Ways To Survive A Market Downturn

Another less-discussed reason may be buying by investors who were short the market, as they were either forced or felt the need to buy stocks to cover outstanding short positions. This buying has been accelerated as the S&P500 broke through several technical resistance levels over the last few months.

Despite this heavy short covering, there still are some heavily shorted stocks in which investors are still convinced that they might retest its lows. These might be candidates for short squeezes, whereby short sellers are forced to buy back stock suddenly to cover positions. This leads to a sharp upward move in price.

The short interest as a percent of the float is defined as the total number of shares of a stock sold short divided by the float.

The days to cover ratio or short interest ratio is defined as the number of days of trading volume needed to cover that short interest, using as the denominator the average volume over a certain period of time.

High Short Percent Of Float
The Bank of the Ozarks
(Nasdaq:OZRK) has 4.7 million shares of its shares sold short, which is 31% of its float. It would take almost 16 days of trading volume to cover this short position. This high short ratio is down considerably from 37 days reached at the end of 2008. The Bank of the Ozarks was added recently to the S&P600 Small Cap Index, which might have caused some buying from index funds.

Synaptics Incorporated (Nasdaq:SYNA) has one of the highest percentages of shares sold short at 45% of the float, and days to cover is 12 days. It would seem that both Bank of the Ozarks and Synaptics might move higher if short sellers went to cover short positions suddenly.

The prospects of a short squeeze may not be likely for these next two stocks, as both have washed out many of its short sellers since the beginning of the year.

Blue Nile (Nasdaq:NILE) has 4.6 million of its shares sold short, representing 39% of the float. While this may seem high, it is only nine days of volume for the stock, and is the lowest short interest ratio for the stock in a year. The peak short interest ratio was 41 days at the end of 2008. Blue Nile's forward price to earnings ratio is 50, so some investors may still be betting against its valuation.

The same trend of short selling appears for World Acceptance Corporation (Nasdaq:WRLD), which has 5.2 million shares sold short, or 33% of the float. This is only six days of volume. At the end of 2008, the short ratio was 38 days.

The Bottom Line

Many shorts have sought to limit losses or book profits and have covered short positions by buying stock back, possibly forcing the market higher. There are still some heavily shorted stocks, and investors should look for possible short squeeze candidates if they conduct short term trading operations. (For further reading, take a look at Profiting From The Squeeze.)

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Stock Analysis

    Investors Need to Stop Shorting GoPro. Here's Why

    Discover why investors should stop shorting GoPro. GoPro has been one of the fastest-growing companies since 2005 with many betting against more growth.
  10. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  3. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  4. Gross Exposure

    The absolute level of a fund's investments.
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!