naked capitalism

There is a rather odd article up on Reuters with the headline, “Short selling declines as U.S. stocks scrape new lows” It is mainly concerned with the issue of whether shorts are culprits in the recent price declines of automaker and certain financial shares. The declining short interest says the attempts to implicate them are most decidedly misguided. That part it does well, But some of its omissions are striking.

We’ve commented before that financial short interest is down, in the context of Citi. So that part is not news. And shorts on the automakers being down is no surprise.

But even though as the article indicates, financial shares are well off their July levels, they have also rebounded further off the recent bottom than most other shares. If you use, say, XLF as a proxy, financials have bounced 35% versus 18% for the market as a whole.

A big issue not mentioned in the Reuters piece is that, aside from the fact that the stocks are well down from their peak, is that both financials and auto companies are subject to government intention (the capital injections, the , making a short call much tricker than at other times.

And the article also neglects to mention that short interest is actually a bullish sign, since any short sale will eventually have to be covered with a purchase of the shares.

From Reuters:

…..since July 10, short interest on financial companies has fallen nearly 40 percent to an average of 3.68 percent on November 14, according to Short Alert Research data released this week.

Among brokerages, the decline in short interest – the ratio of stocks sold short to overall shares – was an even greater 43.5 percent.

Short interest in automakers has declined 32 percent in the past five months to roughly 11.5 percent,