Bears Boost Bets With ‘Short’ Sales

Bearish investors made a wave of fresh bets on lower share prices beginning in mid-July, and as of Aug. 12 many of those investors still were unconvinced that the market had seen its worst levels, new data show.

If stocks continue to resurge, proving the bears wrong, those investors could add fuel to the rally by purchasing shares to terminate their bets.

The New York Stock Exchange on Wednesday said that “short interest”--the number of NYSE-listed shares borrowed and sold, usually in a bet on falling prices--soared from 7.55 billion shares in mid-July to a record 8.08 billion as of Aug. 12.

Short sales of NYSE shares have jumped 21% since mid-May, when the market began a steep new decline that left key indexes at five-year lows by July 23.

Short sellers can profit in bear markets by borrowing stock (usually from a brokerage’s inventory) and selling it immediately, with the idea of buying it back at lower prices later. The profit, when the strategy works, is the difference between the sale price and the repurchase price.

But shorting is a high-risk strategy because of the chance that a shorted stock will rise rather than fall. In that case, a short seller’s losses are potentially unlimited: They mount until the stock is repurchased and the loaned shares are returned.

The record level of shorted shares outstanding as of Aug. 12 shows that many short sellers did not rush to close out their bets between July 23 and Aug. 12, even as the market rebounded sharply in that period.

The Standard & Poor’s 500 index jumped 13.3% between July 23 and Aug. 12, and has since risen further, closing Wednesday at 949.36. That is a 19% gain since July 23.

If stocks continue to rise, more short sellers may pull the plug on their bets. That buying pressure could help drive share prices higher, analysts note.

“This certainly lays kindling on any rally that should ensue,” said Elliot Blumberg, manager of Vigilant Investors’ Fund, a Santa Monica-based hedge fund.

In a separate report Wednesday, the tiny American Stock Exchange said short interest in its shares surged 12% between mid-July and mid-August. The Nasdaq market will report its short interest later.