Specialist short selling ratio - off the charts?

Discussion in 'Order Execution' started by 007Arb, Feb 21, 2004.

  1. 007Arb


    This week the specialist short sales ratio, reported with a two week lag, is 20.6%. I don't recall this ratio ever being this ultra-bullish. Anyone still follow this indicator? Of course, nowadays I notice such drastic changes in various indicators are easily explained away by the gurus to fit whatever their bias is. On the other hand, I can understand that there has been a secular trend towards more shorting by the public which may impact the effectiveness of the specialist short sales ratio.
  2. Interesting that you mention it - I recently read about this indicator in 'Stock Market Logic' by Norman G. Fosback. According to him readings below 35% are very bullish (I have to mention that the data used was collected between 1941 - 1975). I dont know how much you should read into it, as I havent been collecting the data so far (I would be interested in historical data on this indicator though).

    I usually follow the 'member net buy/sell' - if you overlay the data with a S&P 500 chart, it is stunning to see how often they have been right. Not counting this week´s data they have been net sellers over the past couple of weeks.

    I´ve been getting interested in the member net buy/sell number after talking to a former specialist. He told me that as a specialist in extreme bullish phases, you´re pretty much always on the wrong side of the market, since you have to take positions in order to even out order imbalances. So if the public is buying the heck out of the market, specialists have to sell (short) it to them.

    And this is the intersting thing about it: if they believe that the market it running further, they will be looking to cover their shorts as soon as possbile with as less cost as possible for them. But if the specialists turn bearish, they wont hurry to cover (all of) their shorts in the shortest period of time - they stay short.

    So when we´re in a bull market, I´m looking for this number to be flat to positive (single slight negative # are not a problem either). Í get more careful after seeing 2 or 3 weeks with higher readings in this number, because this means that specialists are taking profits or getting short.

    This is only my interpretation of this indicator and in addition I want to mention that this is not the only number I follow - I combine it with several other indicators to get a feel in what state the market currently is - if anybody wants to add / correct something, go ahead!

  3. dbphoenix


    I stopped following it years ago, for a variety of reasons. And as the years have gone by, I've tossed out even more traditional measures. Now the only thing to which I remain loyal is the differential between advancing volume and declining volume. It's been dead on ever since I began using it in 1990, and I can't say that about anything else.

    The best thing about volume is that it really doesn't matter who's doing what, much less why. It all shows up in a price-volume chart, and that makes life real simple.
  4. I have to agree with DB. Volume tells all (eventually). Best regards from rainy CA. Steve46
  5. the NYSE specialist short-sale ratio

    i read this article -linked below- last october though i myself do not closely follow this specific data and believe its recent "success/accuracy" can almost be deemed "arbitrary and circumstantial"... Lowry's Buying-Selling Pressure combined with Advance-Decline Line and New Highs-New Lows in my opinion are a better tell and have been at least equally reliable for this same recent period... and, to be sure, the NYSE's specialist system is The Sleaziest and The WORST in the entire world of all major markets...

    A Market Indicator You Can't Ignore
    By Donald Luskin
    October 17, 2003
    Smartmoney.com Ahead of the Curve A Market Indicator You Can't Ignore

    key excerpts:

    "For years the NYSE has published statistics showing the value of its listed shares that have been sold short. ... The NYSE breaks these statistics down into several categories, one of which is the value of shares sold short by the NYSE's own specialists. (The specialists are a handful of floor traders on the exchange who preside over day-to-day trading, in particular NYSE-listed stocks to which they're assigned)."

    "The [specialists'] ... short sales always represent a significant fraction of total short sales. Since 1997, specialist short sales have averaged about 40% of the total — they've been as high as about 62%, and as low as about 20%. Right now it's at the low end of the range, at 28.2%."

    "When the ratio is low — in other words, when the specialists as a group have only relatively small short positions — the market is more likely to perform well over the long term. But when the ratio is high — and the specialists are holding large short positions — the market could be ready for a drop"

    "Now look back at the chart showing the smoothed ratio since 1977. You can see that, right now, we're at an extreme point — and extremely bullish point. But you can also see that this is not a short-term indicator. The exact moments of the extreme lows haven't been times when the market was immediately poised to explode to the upside. But as the numbers show, from those same points a little bit of patience was richly rewarded."


    3 quick questions:
    - anyone know of "best" place to get the NYSE specialst short-sale ratio data and chart...?
    - karabugla -- where do you get the 'member net buy/sell' data from...?
    - dbphoenix -- are you the same db of db's Burrow....? based on your comment here, sounds like so... if you are, your website & text were absolutely brilliant... know pdf text was available for a time on the Yahoo Group i would be very interested and much appreciative in getting/purchasing a copy if possible... cheers...

  6. Mecro


    If you have a link I would like to see this info.

    The only problem is that most specialist positions are never reported. Only years after, you look at their positions from their investment account in the SEC filings. I'm sure these abuses are much less than before, but still.

    What I do know is that specialists make money regardless of the volume or market direction. So if this 20.6% short ratio is about close to the true number, then the market, or at least the majority of NYSE stocks are not going into a sell-off.
  7. I've commented before on this but not in this context. I believe that the likelihood of a substantial pullback is limited (with the exception of a news event related drop). If you look back at the Put/Call ratios (equity/Index) you may see that there has been a lot of activity and I attribute that to institutions and knowledgeable retail traders "insuring" against loss. This also allows them to stay in during this seasonally uncertain time.

    Gary, I appreciate your comments about short selling ratio, but I believe the data sources the retail trader can obtain are likely to be misleading or unreliable.

    Good luck in the markets everyone. Best Regards, Steve46
  8. ertrader1

    ertrader1 Guest

    If that short sale ratio, of the Specialst is at the level posted, it will be a slow grind sideways with spikes down untill key levels of support are broken....time frame, i have no idea.

    The smart money is short and has been for a while, for those of you with access to the bloomberg terminal, not the website, you know the function to pull up the hedgefunds and their short/long ratio's as well as many other reports to show you where the smart money is.

    The sheep are long, once again, and the influx of money into the Mutal Funds (which is always long except for maby a short fund or two) and the portfolio managers are riding high on the idea of an election year historical patterns, LOL.

    But, like i said, this will be a sloppy rest of the year with very low volume, almost like a ship that has sprung a leak the size of a dime. The ship will still float and many aboard will continue to party on the ships deck, meanwhile more leaks will appear and eventually, they will relize what is about to take place.....

    But watch out for that Hat trick, the Capture of OSMA,
  9. shaq48


    Jeff Cooper on Real Money wrote about this ratio within the last week. A tidbit of what he wrote.

    However, since Feb. 11's test of the Jan. 26 high, the S&P has treaded water. Could it be that there are shorts who are trying to protect the baby at this 1160 juncture? As you and the whole world know, 1160 is a major midpoint between the market highs and lows.

    Those hedge funds with large short positions have been hurting -- 1160 is their line in the sand. This is where their golden gurus tell them another up leg will commence. No wonder they are protecting their turf. Or at least they are trying to protect their turf.

    And, let's not forget that there are 6,000 hedge funds out there. The low-specialist-to-public-short-sell ratio indicates that there are a lot of shorts among the public. (And, by the way, hedge funds are considered the public.)

    or so.
  10. ertrader1

    ertrader1 Guest

    Very interesting. However, I take most of the pundits and their writing with little concern. This guy is one of them...."hedgefunds are considered public". In a sense they are open to the public yes...however, Hedgefunds investors have to meet a wealth standard, same as the privite placement rule. So this statement is missleading.....the average 9 to 5 joe is not in hedgefunds.

    The average joe public is in mutalfunds, and they are LONG...PERIOD. The increase of Inflows to these mutal funds over the past few months is where the PUBLIC has placed their bets.

    IMHO, the smart money is short, and with the increase in options volume, they are not hurting.........as this idiot writes. Most hedgefunds, do take direction, but they also hedge.....thereby releasing the tension of being squezzed.

    Even with the soon to be captured OSMA, i doubt the PUBLIC aka HEDGEFUNDS are gona cover in mass panic.....lol......as this guy is in a round about way predicting.
    #10     Feb 22, 2004