Sunday, April 29, 2007

HERO - Short Interest

Given the extraordinary short covering rallies that occur due to short interest (think AMZN), it is worthwhile to take a look at this from time to time. For all stocks, not just NASDAQ stocks, you can look this up here. On Yahoo, you only get the older (30-days stale) numbers. So if you like to look at this sort of thing (and I'm not pretending that I have any great insights), you may wish to use the above link.

I own HERO as you know, and I decided to look at the short interest in it given that they report tomorrow. I found this 4-fold increase in short interest and a 5 fold increase in volume interesting:

Tomorrow they report. So if there is a positive earnings surprise, there will be some extraordinary fuel for the fire. Given the fundamentals, had I looked at this short interest sooner, I don't think that I would have been dissuaded from buying. I'll post tomorrow. My position is up 8% , and I have previously closed positions that I've made fine money on. So I'm not feeling vulnerable, even if the news is bad. But if it goes down 20% then I might have a different idea about that!

As you know, I have an amateur interest in technical analysis. I'm not facile with it my any means, but I am becoming more competent in recognizing opportunities as well as trouble spots. My point is that it would seem to me that there ought to be a dimension to technical analysis--automatic, not one that you had to do by hand--that would register changes in short interest from month to month as you were looking at chart readings. What would be interesting to see in the volume chart is some metric that would register either the absolute amount of short interest, or a percentage of short interest.

Why would this matter? Well, I'm no expert as I say ad nauseum. But if the price action is affected by short covering due to high short ratios, in my view that is a 'false tell' relative to the long term health of the stock. Sure, the fundamentals may have improved which caused the initial price increase. However, the subsequent surge due to exposed shorts is likely to push the price further beyond 'ordinary' reaction. Accordingly, the price overshoots what one would expect to be a more balanced price owing to underlying fundamentals. My conclusion, then, is that if one buys into one of these surges without understanding the short position, you risk falling into the 'reversion to the mean'.

Perhaps I'm overthinking it, but I don't think so. I'd welcome your comments.


I am re-reading my delightful little book, and I urge you to add this to your investing library.


joey said...

Leisa or another of her canny readers:
what is the dynamic or the driver of the short squeeze?
is the uptick in price of the underlying stock triggering the shorts' protective stop? is it a margin call on the short? is the stock called back by the lender?

I assume shorts more vulnerable if the %age of shorts/float is high, as accessible shares become scarcer?

I read an article a day or two ago about one big money strategy being preying on susceptible shorts. How do they slaughter?

naive here, but very interested, as my 1st and only short - a few months ago - was shares of Joann Stores (JAS)...not a portfolio enhancing holding!!

any contributions to my 'smartening up' would be gratefully received.

regards all,


Leisa said...

Joey, I think that it can be any of those things. I saw someone post on another website (BC?) that their broker, Scott Trade, called the shares on his short.

Did you catch the Jim Cramer insider yappin' video that BC had on his site (and you could find other places)? He talks about how this is done. In fact, in his book, he talks about how it was done to him. I guess one way to do it is to buy stock at the ask price so that it keeps getting ratcheted up. Or, the nasty rumor mill can get started.

A nasty business. And the obverse happens when you're long and you can see folks trying to shake the trees and get the weak holders out.

I've not had great luck with shorting. But I think it is like anything, you have to do it to gain experience and keep your positions small.

dms said...

new reader but i'm soaking it up all pretty quickly... thanks for your insights and thoughts.

Leisa said...

dms, Welcome!

joey said...

tx, Leisa, for your input.

I did listen to the Cramer rant - but was so agog about the forest that I think I missed some trees - particularly, the unusual ones. I will revisit the interview and look for his book - hopefully, the library, as I won't buy it.

No, I didn't read of the Scott Trade brokerage cover call; but recognize it as a theoretical possibility, if the %age short is high compared to the float; ie., if purchaseable shares are scarce. Am I right? So, when I sell short, my broker borrows the shares elsewhere to make the trade; and if my broker's supply chain dries up, I am called and forced to cover.
So, Scott Trade, a discount on-line it possible such a brokerage might not have a sufficiently deep and adequate supply chain?
Do you know the story about Fairfax Financial (FFH)? BTW - digressing - there is a very very good MSN Berkshire Hathaway discussion board, with some very accomplished people posting - understandably, with a value bias - and FFH commentary gets lots of air time. Anyway, the shorts were killing the stock - alleged lies, conspiracies, etc. - FFH is suing some of the perp's. I think FFH will win.

Getting to the point: I remember reading a discussion about rallying against the shorts by forbidding the broker to lend one's shares...some seemed circumspect about the enforceabilty of that edict...another suggestion was that one take delivery of FFH shares - ie., not hold them in street form in the brokerage account...

Nasty business, this...



Leisa said...

Joey, I found this while perusing (for fun, I have a strong distaste for message boards). I thought you might find it of interest (This was in response to HERO short interest).

NASD Rules and Shorts and have some fun (Not rated) 30-Apr-07 07:57 am
I believe we all know the float and approximate short interest. Rules require a broker dealer to have physical custody of shares under a few conditions. Two such conditions are (a) When the shares are held in a cash account. (b) When a sell GTC is present on the shares within 15% of the current price.

If you don't believe me (as you should not believe anyone on a message board) google up "segregation rules" with some other search arguments like NASD, SEC or broker dealer.

Here is how to have fun. If you have a margin account (margin is the main way broker dealers get shares to lend for short selling) move your HERO into a cash account. If you do not have a margin account, put in a GTC sell order late this afternoon at around 15% over the late aftenoon price.

Under either scenario you are forcing your broker dealer to go to the market and acquire shares. This is the equivalent of creating a buy at the market order for your amount of shares. Your broker dealer will do this to stay in compliance with regulations.

Have a very nice day fellow believers!


russell120 said...

Short squeezes have always seemed more common in commodities, particularly when someone takes a relatively large or illiquid position.

With stocks the Santa Claus squeeze is fairly well known. "Someone" who wants a quick boost to their year end numbers (because it's Wall Street's bonus time) will start buying up a relatively small illiquid stock with a large short holding somewhere around mid-December. They will typically sell it off in early January. This may or may not net them a gain for the trade, but will boost their numbers for that particular year end.

joey said...

tx for comments, Leisa and Russell120.

info in the article was new to me.

happy to report that my JAS hole is shallower, as the share price shed $1.05 today.

happy also to be enjoying the beautiful fatigue after an afternoon's outing on the Conestogo River. No trout; but I brought home a nice 19 inch northern pike.

regards all,