Short-Sellers Continue to Gang Up on Nasdaq

Bearish investors continued to add insult to injury in the Nasdaq market over the last month, as “short sales” of Nasdaq-listed shares rose to a record.

Nasdaq said Wednesday that short sales outstanding--stock borrowed, then sold in a bet that the price will decline--totaled 3.5 billion shares as of Dec. 15, a 3.6% increase from mid-November.

The technology sector’s continuing woes apparently encouraged more investors to bet against the stocks by selling them short.

In a short sale, an investor borrows stock from a brokerage and sells it immediately. The bet is that the market price then will slide, allowing the investor to repay the borrowed stock with new shares purchased at a lower price.

If the short seller bets correctly, his profit is the difference between the price he got in selling the stock and the price he pays to buy it back.

Short selling is extremely risky, however: If the market price of a shorted stock rises instead of falls, a short seller’s losses are potentially unlimited until he repurchases the stock and closes out the bet.

With Nasdaq’s crash this year, many short sellers should have profited handsomely. And so far, given the record number of Nasdaq shares sold short as of Dec. 15, short sellers overall do not appear to believe the tech sector has bottomed, despite the deep declines in many of the stocks.

Still, if Nasdaq should begin to rally significantly in 2001, the large number of shorted shares outstanding could be bullish: As short sellers rush to buy stock to close out their bets, they can add to buying pressure, helping to fuel a rally.

Major tech stocks whose shorted shares outstanding rose between mid-November and mid-December included Cisco Systems (ticker symbol: CSCO), WorldCom (WCOM), JDS Uniphase (JDSU) and Broadcom (BRCM).

Among the stocks whose shorted shares outstanding declined in the period were EarthLink (ELNK), Vitesse Semiconductor (VTSS), Adobe Systems (ADBE) and Veritas Software (VRTS).