The Shorts Are Back, In Force...

On occasion herein I'll make reference to "short interest" or to the "shorts" when referring to traders who are betting that the market (or a given stock, commodity, etc.) is about to fall. Shorting is the act of selling borrowed shares with the expectation that they'll be returned to the lender after the borrower repurchases them at a much lower price; the difference being pocketed by the borrower.

Imagine the panic if/when the value of those shares begins to move above the level where the short seller sold them. The prospects for having to buy them back at a higher price can be scary (as upside risk is unlimited) to say the least.

When you hear the term "short-covering rally" it's typically associated with a huge upward burst on high volume, often following a general market decline. The assumption being that panicked short sellers got "squeezed" out of their positions; i.e., were essentially forced to buy them back, which exacerbated the market's up move.

Well, the shorts have been active lately, big time:   click to enlarge...



On the one hand, if you're worried about the near-term, and you believe that those with the guts to go short (very dangerous game) have to know what they're doing, well, you should be worried. On the other, if your time frame is more than a few days, weeks or even months, and if you think that the price action of late conflicts with general conditions, you're likely relaxed, and -- not that it matters in the longer-term scheme of things -- you expect to see huge rallies as the present high number of shorts feel the squeeze.

In any event, "huge" is an apt description of many of the moves we'll continue to see over the next few weeks -- again, in both directions...