I noticed that GNTA has a short ratio of 23. That's 30% of the float and would take 23 days for the shorts to cover on average daily volume. Doesn't that make this stock much more volatile? Probably the shorts pushed the price down [Tuesday] as it hit a low of 10.30. Does this high short interest figure into your selection methodology? And if so, how do you use the information? (June 7, 2003)
We view short interest on a stock much the same way as we view it on the market as a whole, i.e., a contrary indicator. When short interest is high as it was during September and October before that bottom and then again in January, we view this as setting up the next move higher, particularly when the overall price/volume action is solid and leading stocks are still holding up well.
Thus when an individual stock has a high short interest in addition to a solid pattern and good overall accumulation, it is icing on the cake to have a higher short interest. Why? Because if all of the nuts and bolts of the primary indicators are solid it is still setting up for a move, and when it makes that move, i.e., breaking resistance, the shorts will start to cover and give the stock even more upside strength. Remember, when a stock or index clears resistance in a downtrend, the shorts start to cover. That is what happened in the move off the October low; as Nasdaq took out resistance level after resistance level, the shorts covered. That was fuel for the rally. Rallies often start on short covering. If it is to survive real buyers will have to come in along with the shorts.
Thus, if a stock has good accumulation and a nice pattern despite the short interest, then it has a potential extra fuel cell on it to drive it higher. On the lower volume test of the 18 day MVA on the Tuesday intraday low, GNTA shook out some of the sellers that were holding the stock for the upside move. When it started back up there was some short covering. Friday there was buying and short coverign as GNTA shot higher on huge volume. The shorts tried to take it down as it sold back to the 10 day MVA intraday, but it turned and closed at the high as the good accumulation and pattern won out over those shorts trying to drive it back down.
Stocks with higher short interest can be more volatile as the bulls and bears are going toe to toe, but if it has good credentials we view that higher short interest as a positive. Remember we typically do not take a position until there is resistance broken. When resistance is broken, shorts tend to cover. That just provides more juice to the move.
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