Again this week there have been some big moves by the shorts in a number of stocks on the ASX.
Magellen Financial has seen shorts increased by nearly 200%, while the fall in Blackmore’s share price has finally encouraged the shorts with an increase in short positions of 72%. But’s that’s after the price had already fallen $70 from the high around $210.
On the other side of the market, Breville group was the only big fall in shorts with a reduction of 48.9% in short positions.
But instead of reporting the big moves we asked Angus Nicholson, market strategist at IG, if he could give us a little more detail about the stocks the shorts really love. That is, the stocks the shorts have sold heavily in anticipation of a fall in prices.
Rather than just the outright level of shorts, or even the percentage of shorts, Nicholson struck on a metric which is a strong indication of the degree to which short positions have built relative to the overall liquidity in a stock.
That metric is the short interest ratio in terms of “days to cover”. Bear with me here, but this is a compelling metric because it tells you the size of the short positions in a stock relative to the actual level of trading in a stock.
That’s a better reflection of the true positioning because it reflects the actual float of a stock in the market as opposed to the total shares on issue – many of which will hardly ever be transacted on market because they sit in passive, buy and hold, or index portfolios.
So, Nicholson’s definition of “days to cover” is “the estimated days it would take all the short sellers in the stock to cover the outstanding short positions based on the recent average daily trading volume. Ie total shares sold short divided by the average daily volume in the stock”.
Which is where things really get interesting.
Based on data provided by Nicholson and IG it would take the shorts more than 13 weeks to buy back all the stock they have sold. Certainly MYOB has traded up to a recent one-year range top, which given the company only floated in May 2015 is fairly elevated for the company’s short listed life.
So, when you add in other technical factors (shape of the pennant pattern), recent prices look like they offer a compelling place to sell.
But 65 days of volume worth of selling suggests at some point the shorts themselves will be support of the MYOB share price on any dip. Either that or it is going to be one heck of a scramble if the range top breaks.
Other stocks which have many week’s worth of short positions in the market include Flight Centre, which has 42 days of turnover worth of short positions. It saw a big increase of 40% of total short positions in just the last week.
Given the way the price is looking, some of those shorts might be nervous as Flight Centre breaks out of its little trading pattern today. A move above $33 might really see a scramble by the bears to cover.
Here’s the rest of the top 10 shorts by days to cover.
And here is the list of this week’s big movers.
Source: IG, ASX
You can follow Angus on Twitter: @ANicholson_IG