Short interest is the amount of shares in a stock that is sold short, and not covered, expressed in a percentage of a stock's market capitalization. When a stock is sold short, the stock is borrowed from a holder of the stock and sold. The borrow rate will rise if there are more short sellers and fall if there are fewer shorts.

Typically, the short interest percent is above 2%, averaging about 2 1/4% since 2004. The high in 2008 was just north of 3.5% and the low prior to 2020 was 2% in 2019. Currently, the short interest percent is 1.6% the lowest since 2004, as sourced from Goldman Sachs through The Daily Shot.

The borrow rate is closely related to short interest. The borrow rate is calculated by ORATS by solving for the residual yield left over after a put-call parity calculation. The borrow rate approximates the borrowing rate charged by brokers to lend stock for short selling.

A two-year graph of the borrow rate for the S&P 500 constituents weighted average below shows that for 2020 the borrow rate was well below the average pre-2020. Typically, the rate is 1.5% but currently the rate is -1.1%.



The lower the borrow rate, the lower the demand for borrowing stock and the lower the short interest. In the graph, around the Covid-crash borrow rates jumped around a bit: The widening of the market associated with the market tumult made the job of determining the residual yield difficult to pin down. When the dust settled the borrow rates had fallen well below the typical rates seen in 2018 and 2019.

Recently, the borrow rates have continued to fall. Borrow rates are commensurate with investor sentiment. The lower the borrow rates the higher the investor sentiment. The current market is certainly communicating that investors are still positive with their outlook. At least, very few are left to short this powerful move in the market.


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