Before we analyze Alcoa’s (AA) short positions, let’s first discuss a few key terms. Short interest tells us the number of shares that have been short sold. Exchanges release the short interest on a fortnightly basis. Short interest tells us the general market mood in regards to a particular security.
From the short interest, we derive the short interest ratio, which is nothing but short interest divided by average daily traded volume. Short interest ratio and the short interest to market capitalization ratio basically standardize the short interest. It’s natural that more liquid and large companies can have high absolute short interest. Therefore, we standardize short interest to the market capitalization or the trading volumes.
Short interest ratio
The graph above shows Alcoa’s short interest ratio plotted against its stock price. In January, Alcoa’s short interest ratio was the highest since 2013. This is not surprising as markets started factoring in a chance of a global recession this year after poor Chinese economic data spooked global markets in the first trading week of the year.
Short interest ratio increased
However, Alcoa’s short interest ratio has climbed again according to the latest update as of March 31, 2016. Bears (RWM) (SPXU) seem to be fancying their chances with Alcoa even as long-term institutional investors look the other way around.
However, high short interest can also trigger a typical short squeeze leading to sharp upward price action. In the next part of the series, we’ll explore what could trigger a short squeeze for Alcoa bears.