these are 2 year charts of the SPY & QQQ closing prices plotted against their short interest. by my interpretation, these charts only further illustrate the potentially dangerous complacency in the markets lately. although i will reference the various sentiment surveys from time to time, i only find them useful when at extremes. sentiment survey are just a form of “rhetoric” IMO. traders might say they are bullish, bearish, or neutral but that is just “talk”, not necessarily “action”, or how those respondents are actually positioned at the time. the short interest data show us exactly where traders are, or are not, placing their bets.
when i view these charts, not only do i see short interest at multi-year lows, a red flag in itself, but notice how we only saw a very modest uptick in short interest on the sharp sell-off following the april 1 (reporting period) highs. not only that but look at how the short interest has dropped off since the market’s recent lows (the june 1st reporting period marked the lows in the SPY & QQQ with the most recent reporting period shown on chart as july 1st). that one month sharp drop in short interest was not in line with the modest rise in the markets and definitely not in line with all the rhetoric that i’m hearing about how “everyone is bearish and short the market and that’s why it will only go up, etc……”
does all this mean that the market must now go down? of course not. this is only one piece in a nearly infinite amount of variables that make the market tick. however, taken in conjunction with the VIX and VXN at or just above multi-year lows/support as well as the deteriorating fundamental and technical outlook it tells me that i might want to continue to maintain a defensive or bearish posture to the market at this time, regardless of the abundance of bullish chart patterns and apparent resiliency of the market in the face of all the negative headlines.
