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Stocks with low short interest tend to outperform heavily shorted names.
Short interest measures the percentage of a stock's float that has been sold short by investors betting on a price decline. Academic research shows that highly shorted stocks tend to underperform the market, making short interest a valuable negative signal.
Desai, Ramesh, Thiagarajan, and Balachandran (2002) found that stocks in the top decile of short interest underperformed the market by 1.13% per month. Boehmer, Jones, and Zhang (2008) confirmed that short sellers are informed traders whose positions contain valuable information about future returns.
Our factor uses short interest as a contrarian signal: stocks with LOW short interest (indicating less bearish sentiment) receive higher scores, while heavily shorted stocks are penalized. This captures the "smart money" information embedded in short-selling activity.
Our short interest score combines two short-selling signals, both inverted so that lower short interest produces higher scores:
• Days-to-Cover (60% weight) — Short interest divided by average daily trading volume. Higher days-to-cover means shorts are more entrenched and harder to unwind.
• Short Interest Change (40% weight) — Period-over-period change in shares sold short. Rising short interest signals increasing bearish conviction.
When FINRA short interest data is unavailable for a stock, beta is used as a proxy signal (higher beta ≈ more speculative, lower score). Short interest data is sourced from FINRA bi-monthly settlement reports. The factor receives a 10% weight in our composite.
Desai, H., Ramesh, K., Thiagarajan, S., & Balachandran, B. (2002)
“An Investigation of the Informational Role of Short Interest”
Journal of Finance
Boehmer, E., Jones, C., & Zhang, X. (2008)
“Which Shorts Are Informed?”
Journal of Finance
Rapach, D., Ringgenberg, M., & Zhou, G. (2016)
“Short Interest and Aggregate Stock Returns”
Journal of Financial Economics
The short interest factor uses two metrics: Days-to-Cover (60%, short interest / avg daily volume) and Short Interest Change (40%, period-over-period change). Both are inverted — lower short interest produces higher scores. When FINRA data is unavailable, beta is used as a proxy.
Highly shorted stocks tend to underperform because short sellers are often sophisticated, informed investors. When many informed traders bet against a stock, it signals fundamental problems or overvaluation that the market hasn't fully priced in.
Short interest above 10% of float is elevated and worth investigating. Above 20% is highly shorted and often signals significant bearish sentiment. Our scoring penalizes stocks progressively as short interest rises.
Yes. Stocks with very high short interest can experience short squeezes (rapid price spikes as shorts cover). However, these events are unpredictable and temporary. Our factor focuses on the long-term signal that high short interest predicts underperformance.
Short interest is reported by FINRA twice monthly (mid-month and end-of-month settlement dates). We source this data and update our scores within 24 hours of each FINRA report. When data is unavailable, beta serves as a proxy signal.