Short Interest as a Signal: Following the Smart Money in 2026

#What Is Short Interest?

Short interest measures how many shares of a stock have been sold short—borrowed and sold in anticipation of buying back cheaper.

High short interest: Many investors are betting against the stock

Low short interest: Few investors are betting against the stock

#Why Short Sellers Matter

Short selling is expensive and risky:

• You must borrow shares (paying fees)
• Unlimited loss potential if the stock rises
• Short squeezes can force painful exits
• You're betting against the market's natural upward drift

Given these obstacles, why would anyone short? Because they've done extensive research and believe the stock is significantly overvalued.

Short sellers are essentially professional skeptics. They do the work that long-only investors often skip.

#The Academic Evidence

Rapach, Ringgenberg & Zhou (2016)

Published in the Journal of Financial Economics, this study found that aggregate short interest predicts market returns. When short interest is high market-wide, future returns tend to be lower.

More importantly for stock selection: stocks with low short interest outperform those with high short interest.

Gorbenko (2023): International Evidence

Recent research by Gorbenko tested short interest signals across 32 countries. The finding held in 24 of 32 markets—a remarkably consistent result.

#How Short Interest Predicts Returns

Stocks with high short interest underperform for several reasons:

1. Short Sellers Are Right

Simply put, heavily shorted stocks often have real problems. Short sellers do their homework and identify overvaluation.

2. Negative Information Flow

High short interest creates selling pressure. Short sellers may also publicize their research, attracting more sellers.

3. Fundamental Deterioration

High short interest often precedes negative earnings surprises, restatements, or other bad news.

#Our Approach

We use short interest as one of six factors:

• Weight: 10%
• Calculation: Days to cover (short ratio) or percent of float shorted
• Direction: Lower is better (inverted scoring)

What We Measure

Days to Cover (Short Ratio): `` Days to Cover = Short Interest ÷ Average Daily Volume ``

A stock with 10 million shares short and 1 million daily volume takes 10 days to cover. Higher = more bearish sentiment.

#The Bottom Line

Short sellers are sophisticated, motivated, and well-researched. When they largely ignore a stock, that's a positive signal. When they pile in, that's a warning.

We don't recommend shorting anything. We simply use short interest as one input among six to identify stocks where the smart money isn't betting against you.

See stocks with lowest short interest →

#Academic Sources

• Rapach, D. E., Ringgenberg, M. C., & Zhou, G. (2016). "Short Interest and Aggregate Stock Returns." Journal of Financial Economics

• Gorbenko, A. (2023). "Short Interest and Stock Returns: Global Evidence." Working Paper

• Dechow, P. M., Hutton, A. P., Meulbroek, L., & Sloan, R. G. (2001). "Short-Sellers, Fundamental Analysis, and Stock Returns." Journal of Financial Economics