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‘Short sellers’ fled the market in July; we may miss them

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Stock market ‘short sellers’ rushed to close out their bearish bets in late July as share prices surged, new data show.

That rush helped drive the market’s powerful advance, just as many analysts had suspected at the time.

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The bad news: The removal of so many short bets in a two-week period also quickly burned up potential fuel for a continuing rally.

The number of shorted New York Stock Exchange-listed shares plunged to 14.03 billion as of July 31, down a steep 10.3% from the 15.64 billion shorted as of July 15, the NYSE said today.

That marked the biggest percentage drop since the 13.4% dive in the second half of September, when the Securities and Exchange Commission stunned Wall Street by banning short selling of 800 financial stocks.

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In a classic short sale, a trader borrows stock (usually from a brokerage’s inventory) and sells it, expecting the market price to decline.

If the stock drops, the trader can buy new shares later at a lower price, repay the loaned stock and pocket the difference between the sale price and the repurchase price.

If the stock rises, however, short sellers face potentially unlimited losses until they buy back shares and close out their bets.

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The plunge in shorted NYSE shares in late July shows that many bears were scrambling to get out of their trades as optimism blossomed. Better-than-expected second-quarter corporate earnings reports just made life tougher for the shorts.

Their buying to close out their positions added to the market’s momentum: The Standard & Poor’s 500 index jumped 12.3% from July 10 to July 31.

The number of shorted shares also fell at Nasdaq, but not as steeply as at the NYSE. The total Nasdaq short position declined to 6.78 billion shares as of July 31, down 5% from 7.14 billion on July 15.

-- Tom Petruno

. Broady the Bear from ‘Grizzly Park.’ Credit: American World Pictures

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