Why Following Short Interest in a Stock Is Important

08/20/2009 12:01 am EST

Focus: STRATEGIES

Nick Perry

Equity Options Trader, Schaeffer's Investment Research

As explained in the Schaeffer’s Investment Research education section, short interest is a useful sentiment indicator that measures the level of investor pessimism toward a stock.

While it isn't always a simple "long-only" indicator, it can give you insight into situations where you might see concentrated buying demand.

The purpose of following these stocks is to highlight heavily-shorted companies that could be in the midst of a potential short-covering rally.

Methodology: The query scans my database of companies, which has some basic filters to eliminate stocks that don't trade frequently.

The table below is a filtered list of stocks from yesterday that have at least 10% of their floats sold short and that showed a gain in the previous trading day.

I use this as a tool for finding situations where stocks with heavy short interest have begun to move.

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Click to Enlarge

By Nick Perry of Schaeffer’s Trading Floor Blog

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