Monthly Short Interest
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The Short Interest Ratio represents the number of days it would take to cover short positions. It is calculated as the Short Interest for the Current Month divided by the Average Daily Volume if trading continued at the average daily volume for the month. A low number represents extreme optimism which is bearish for stocks, and a high number represents extreme pessimism which is bullish for stocks.
In the spring, there was an extremely low level of short interest (optimism) that coincided with the market sell off in May. In fact, it was the lowest level of short interest since the bull market began in the fall of 2002, so isn't surprising that it was also one of the most severe market corrections. In the summer, there was an extremely high level of short interest (pessimism) that coincided with the start of the current market rally. It was actually the highest level of short interest since early 1998, so it is consistent that the current rally has had so much strength.
In October, the ratio fell slightly reflecting a decrease in pessimism, but the current level in December still shows a good deal of skepticism by investors which is surprising considering how strong and broad based the stock market rally has been. The high level of short interest will provide support under any price corrections until the ratio works its way lower.
