Decline in ‘Short’ Selling Suggests Bearish Traders’ Wariness on Tech

“Short” selling of Nasdaq stocks dipped slightly in the last month, a sign that many traders may be reluctant to step up their bearish bets on technology stocks despite the sector’s continuing slide.

As of Nov. 15, 3.379 billion shares had been sold short on the Nasdaq Stock Market and not yet bought back, Nasdaq said Monday. That was down 0.2% from the total as of Oct. 15.

In a short sale, a trader borrows stock from a brokerage and sells it. The bet is that the stock’s price will slide, allowing the trader to replace the borrowed shares later with stock bought at a lower price.

The small net decrease in shares sold short as of mid-November marked a reversal from the previous month, when the total jumped 7.1% to another in a series of record highs.

The decline in the latest period suggests that traders overall are wary of boosting their bearish bets now that tech stocks have fallen so far. The Nasdaq composite index is down nearly 30% year to date.

Between Sept. 15 and Oct. 15, Nasdaq was in a steep decline, losing more than 14%. But tech stocks rallied moderately in late October and again in early November before sliding again after the election.

The rally attempts may have triggered some short sellers to close out their short positions to lock in profits or limit losses.

“There are no new short sellers coming in, and maybe the people who were shorting have taken their profits,” said Will Lyons, editor of Shortonvalue.com. “It shows that there is neither new money nor new interest in short selling.”

Short sellers can profit handsomely if stocks indeed fall: Their profit is the difference between the initial sale price and the cost of the replacement shares.

But if a shorted stock rises instead of falls, a short seller faces potentially unlimited losses. That makes this practice a high-risk strategy.

With tech stocks down so dramatically, some pros say they are lightening their short positions.

Joseph Toms, head of Hilspen Capital Management, a Burlingame, Calif., hedge fund, has cut his shorting in half in the last week, he said.

He figures that the latest drop in tech stocks is due largely to panic selling by individual investors who had bought stocks with borrowed money. He thinks the economy will achieve a hoped-for “soft landing” and says techs may rally in the next few months.

“Most of the damage is done” in the tech sector, Toms said.

Some individual traders say they have increased their shorting in recent months. At the same time, however, they have held back from taking overly aggressive bets for fear that a strong tech rally could decimate them.

For example, Bill Buerschinger, an investor in Toluca Lake, has made money shorting stocks such as Yahoo Inc., Broadcom Corp. and Brocade Communications Systems Inc. But he has repeatedly closed out his short positions well in advance of the steepest drops in those stocks. And he has backed away from shorting other stocks, such as Ariba Inc., that later dropped sharply.

“I’m looking at all of these things and saying, ‘Why didn’t I short them when I was thinking about it?’ ” Buerschinger said.

The number of shares sold short in a given company should be compared with total shares outstanding and average daily trading volume in the stock. A short position that looks large may not be when compared with typical volume.

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‘Short’ Sales Among Key Techs

Here is how the number of shares sold “short” changed for key tech stocks between Oct. 15 and Nov. 15. A short sale represents a bet on a falling stock price.

Where Short Sales Rose

Shares sold short

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Ticker (in millions) as of: Pctg. Stock symbol Oct. 15 Nov. 15 change Apple Computer AAPL 9.0 16.1 +79% Microsoft MSFT 25.5 43.6 +71 Oracle ORCL 34.3 56.8 +66 WorldCom WCOM 36.0 44.7 +24 Dell Computer DELL 26.3 30.5 +16 Amazon.com AMZN 35.4 40.5 +14 Cisco Systems CSCO 53.7 55.8 +4

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Where Short Sales Fell

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Ticker (in millions) as of: Pctg. Stock symbol Oct. 15 Nov. 15 change Peoplesoft PSFT 11.6 6.3 -46% DoubleClick DCLK 14.2 8.2 -42 E-Trade Group EGRP 27.3 19.9 -27 Infospace INFO 16.0 12.7 -21 EToys ETYS 11.7 9.4 -20 Qualcomm QCOM 16.2 13.6 -16 Yahoo YHOO 33.2 29.0 -13

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Sources: Nasdaq, Bloomberg News