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ETF Shorts are Interesting

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ETF Shorts are Interesting

Thursday, 04 October 2007

By Chris Johnson
September short interest for all exchanges is now out. I’m seeing some declines that carried over, as short sellers took the opportunity to close out what were probably some winning positions.

When it comes to ETFs, I look at short interest in a little more detail than most. By that I mean that I like to dig beyond just the shorts on the ETF itself. I also look at the combined short interest of the companies comprising each ETF.

Looking at the ETF short interest breakdown with this method, a few sectors have seen significant reductions in the shorts. These reductions are focused in the Regional Banking ETF (RKH), Financials (XLF), Utilities (UTH and XLU), and Pharmaceuticals (PPH).

The drop in short interest in these sectors/ETFs tells me that the short sellers that had to cover their positions have been doing so, reducing the likelihood that we will see future short-covering rallies in these groups of stocks.

On the other side of the coin, only four of the 32 ETFs I track with this method saw increases in short interest. The Consumer Discretionary (XLY), Homebuilder (XHB), Materials (XLB), and Internet Infrastructure (IIH) ETFs all saw small increases in their respective component short interest.

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The lopsided difference between short interest reductions and additions identifies a drop in the built-in bid (or reserve buying power) that is often represented by large amounts of short interest, since most of these positions have already been covered.

While the overall reduction in short interest will not likely cause the market or these ETFs to stumble, it does take away some of the potential support that is typically indicative of short positions. And that's something worth watching as we head into the high drawdown month of October.
Source : Investors Daily Edge

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