Short sellers stayed the course, and it’s costing them

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Short sellers refused to bow to the stock market’s rally in the first half of April: The number of shorted shares on the New York Stock Exchange edged up to 15.63 billion as of April 15 from 15.59 billion on March 31, the exchange said today.

That suggests that many short sellers -- traders who bet on lower prices -- figured the stock market’s rebound in late March wouldn’t last. So far they’re wrong.

In a short sale a trader borrows stock (usually from a brokerage’s inventory) and sells it. The bet is that the market price of the stock will fall in the near future, which would allow the short seller to replace the loaned shares with stock bought at a lower price. The profit would be the difference between the sale price and the repurchase price.

If the stock rises, however, the short seller loses. That can cause a scramble by short sellers in a rising market to buy shares to close out their bets. And their buying, in turn, can add fuel to a rally.

Between March 14 and March 31, as the average NYSE stock rose 1.9%, the number of shorted NYSE shares fell 2.6%, showing that some short sellers punted as the market turned.

Not so in the first half of this month: The shorted total inched higher even as the average NYSE stock rose 2% from March 31 to April 15.

But the market’s rallies last Wednesday and Friday may have had some help from shorts finally deciding to stop fighting the tape. The NYSE composite stock index is up 5.8% this month. If the bulls can keep it up, this will be the market’s first winning month since October.

Posted April 21, 2008