Detrended short-sale ratio predicts lower stock prices

  • Short sellers are more bearish than they’ve been in two decades
  • Contrarians believe extreme bearish sentiment is bullish, but they may be wrong
  • Detrended short-sale ratio is a strong predictor of aggregate stock returns
  • Short sellers are particularly aggressive in believing lower prices lie ahead
  • Ringgenberg’s index has been confirmed by other studies and works in multiple countries
  • The recent pattern of the short-sale index is similar to spikes before previous market peaks
  • Equity investors should prepare for the possibility of lower prices over the next year
  • Short sellers play a valuable role in keeping stocks fairly valued

Short sellers have recently become more bearish than they have been in two decades, which is a concerning sign for the stock market’s prospects. Contrarians may argue that extreme bearish sentiment is actually bullish, but research by finance professor Matthew Ringgenberg suggests otherwise. His groundbreaking study found that the detrended short-sale ratio is a strong predictor of aggregate stock returns over the next 12 months, outperforming popular indicators like price/earnings or price/book ratios. The recent spike in the short-sale index indicates that short sellers are particularly aggressive in their belief that lower prices are ahead. Other studies have confirmed the validity of Ringgenberg’s index, both in different time periods and in multiple countries. The pattern of the short-sale index resembles spikes seen before previous market peaks, further supporting the notion of lower stock prices in the future. Investors should prepare for the possibility of lower prices over the next year. Additionally, Ringgenberg’s research challenges the narrative that short sellers are bad actors, as they actually play a valuable role in keeping stocks fairly valued. The current sentiment among short sellers suggests that stocks are overpriced.

Factuality Level: 7
Factuality Justification: The article provides information from a study conducted by Matthew Ringgenberg, a finance professor at the University of Utah, on the relationship between short-selling and stock market returns. The article also mentions other studies that support Ringgenberg’s findings. However, the article does not provide counterarguments or alternative perspectives, which could affect the overall factuality level.
Noise Level: 7
Noise Justification: The article provides a thoughtful analysis of the relationship between short selling and stock market prospects. It cites a groundbreaking study by a finance professor and includes data and charts to support its claims. The article challenges the narrative that short sellers are bad actors and highlights their role in keeping stocks fairly valued. Overall, the article stays on topic, provides evidence and analysis, and offers insights for investors.
Financial Relevance: Yes
Financial Markets Impacted: The article discusses the bearish sentiment of short sellers in the stock market, which can impact stock prices and overall market performance.
Presence Of Extreme Event: No
Nature Of Extreme Event: No
Impact Rating Of The Extreme Event: No
Rating Justification: The article focuses on the sentiment of short sellers in the stock market, which is a financial topic. While it does not mention any extreme events, it provides insights into market expectations and potential impacts on stock prices.
Public Companies: New York Stock Exchange (N/A)
Private Companies: GameStop
Key People: Matthew Ringgenberg (Finance Professor at the University of Utah), Amit Goyal (University of Lausanne), Ivo Welch (University of California, Los Angeles), Athanasse Zafirov (University of California, Los Angeles), Arseny Gorbenko (Monash University), Mark Hulbert (Contributor to Barron’s)

Reported publicly: www.marketwatch.com