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By Wednesday, Feb. 4, 2015, as the market bottomed the public was selling at a $9 billion per week clip. Their collective wisdom cost them a ton of money when all January’s losses were made up in just one week. By Valentine’s Day the S&P 500 had made a new all-time high. Like clockwork, the surge was enough to get individual investors to start buying again. Heavy net selling at low prices gave way to billions in new purchases at much higher levels.
‘Short Selling’ is nothing more than borrowing an asset while selling it, with the idea that you can buy the same thing back later at a lower price. There is always some level of short selling going on due to professional hedging activities.
Paying attention to deviations from normal is the key consideration. Over the past seven years the S&P Energy Sector Short Interest typically cycled between 4.5% and 7.0% of the total float.
2015’s incredible rise in Energy Sector short interest, to almost 10%, was unprecedented in both magnitude and correctness until recently. The further from normal things got, the more pronounced the eventual rebound. Moves like this year’s end typically abruptly with 180-degree reversals.
The 2009 through early 2011 period illustrates how painful it can be for the shorts.
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