Bearish Traders Closing Out Bets

Bearish traders who were closing out their bets over the last month may have helped provide support for the stock market in that period.

Nasdaq said Tuesday that short interest -- the number of shares borrowed and sold, usually in a bet on lower prices -- declined nearly 6% from July 15 to Aug. 15, to 4.404 billion shares.

Short sellers profit when stock prices plunge because they can buy back stock at lower prices to replace shares they had borrowed and sold at higher prices, pocketing the difference.

But in a rising market, short sellers’ losses mount until they close out their bets. And when they purchase shares to repay their stock loans, their buying can help drive prices higher.

Nasdaq short interest reached a record high of 4.683 billion shares as of July 15, even as the Nasdaq composite index continued to surge. The index was up 31% for the year at that point. Nasdaq short interest had risen in five of the last six months.

The New York Stock Exchange last week also reported a drop in short interest from mid-July to mid-August.

Nasdaq short interest still is up 9% from mid-January levels. NYSE short interest peaked in October and is down 2.2% since mid-January.