Who's short? Who's long? Then we make a pretty fraction and come up with a published ratio.
That's the recipe. How's it taste? Well...for the most part, meh. In theory, if there are lots of professionals shorting stocks, it means that wizened and schooled, naturally smart people are betting that the market will go down. But, in fact, the way the calculation is made is that it just takes a total gross number of shares short in any market, and kinda makes up a number that represents who or what is long. Maybe that used to be a relevant metric 40 years ago when this ratio really became a Thing, but today, with so much automated trading, with so many hedges being put on and pulled off in such short periods of time, the calculations don't mean a lot.
And then, oh...there's that little thing that the pros are wrong alllll the time. In fact, some 99% of index funds outperform managed funds in their category over 5-10 year periods, at least in the modern, post-Reagan history of Wall Street. So maybe you should have only short interest the next time your broker calls wanting to sell you shares of a hedge fund, a mutual fund, or anything...managed.
Related or Semi-related Video
Finance: What is the Arms Short Term Tra...13 Views
finance a la shmoop what is the Arms Short Term Trading Index not to be
confused with the short arms term trading index a run by this guy all [Man with dinosaur for a head sitting at a desk]
right Richard Arms invented it in the 70s and then a journalist cleverly
renamed it Trin.... short for trading index very clever
yeah well Trin as in Rin Tin is just an index for the advanced decline ratio in
the stock market and if you haven't seen our video on it oh well you should we've
had George Clooney of fortune so directed the computation of the Trin [George Clooney directing a show]
looks like this Trin equals advanced issues divided by declining issues all
over advanced volume divided by declining volume....
So note that this equation maps volume as an element of the computation so it's
meaningfully more useful than just the vanilla advanced decline ratio and hey [Man discussing equation]
just keeping it real their advanced decline ratio we love you but you're [Advanced decline ratio laying on sofa eating doughnuts]
just not as good all right well so if we compute things we get a value of 1 and
well that's good or rather a bullish sign that the market "wants to go
up" above one is bearish and at premiums of 30 40 50 percent ie [Bear walking by a river]
calculations of 0.5 very bullish to 1.5 very bearish well those are signs that
have been validated by actual market performance over time well why would we
care about this calculation in the first place, well if we get the answer right as [Man staring at a crystal ball]
to where the markets going well you know we can make a fortune
yeah ask Warren Buffett... [Warren eating dinner]
Up Next
What is short interest theory? Watch this not-so-short video to find out.