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Alcoa’s Short Positions: A Bearish View of the Split

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Alcoa’s short positions

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 every two weeks. Short interest indicates the general market mood in regards to a particular security.

From the short interest, we derive the short interest ratio, which is just short interest divided by average daily traded volume. The short interest ratio and the short interest to market capitalization ratio basically standardize the short interest. It’s natural that larger and more liquid 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. According to the latest update as of May 31, 2016, Alcoa’s short interest ratio stood at 6.33. The ratio has increased from the previous update when Alcoa’s short interest ratio was 5.43 on May 13. Currently, Alcoa’s short interest ratio is the highest since December 31, 2015.

In contrast, other miners like Century Aluminum (CENX) and Rio Tinto (RIO) had a short interest ratio of 6.4 and 3.54, respectively, as of May 31. Bears seem to be fancying their chances with Alcoa.

Divergence

The divergence in short sellers (SDS) (SPXU) and institutional investors seems to stem from their differing view of Alcoa’s split. In the coming parts of this series, we’ll explore the value propositions Alcoa and Arconic could offer once they separate into two different companies later this year.

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