Short Stock Sales Hit 1-Billion-Share Mark for 1st Time

Short interest on the New York Stock Exchange--a measure of professional traders’ bearishness on stocks--has crossed the 1-billion-share mark for the first time.

The NYSE said Monday that the number of shares sold short was 1.01 billion as of Dec. 15, an increase of 50 million shares from mid-November.

In a short sale, a trader borrows stock (usually from a brokerage) and sells it in the open market, betting the price will drop. If that indeed happens, the trader profits by repurchasing new shares at a cheaper price to replace the borrowed stock.

Though the high level of short selling suggests that many traders believe that stocks are overpriced, analysts note that short traders have been badly confounded since September: Short interest has continued to rise (from 907 million shares in mid-September), but so have stock prices.

Ironically, high short interest can itself be bullish: As short traders rush to repurchase stock to close out their positions, they can add fuel to any rally. So the greater the number of shares sold short, the greater the potential lift for the market if the short traders begin to throw in the towel.