• Beginning short interest effect: Among the 50 largest S&P 500 stocks, short interest as a percent of float rose in the least-shorted stocks and fell in the most-shorted, so both extremes moved toward the group average.

• Return effect: Short selling followed a momentum trend. Short interest rose in stocks with lower returns this year and fell in those with higher returns.

• Size effect: Size matters, but only a little. Short interest rose moderately in the largest companies and fell in a few of the smaller ones.

With the third quarter over, we looked at the short interest change this year for the 50 largest S&P 500 stocks. We compared it with three things: beginning short interest as a percent of float, the stock’s return this year and the company’s market value.

Beginning Short Interest Effect: Toward the Average

• Stocks with the lowest short interest at the start of the year saw it rise, while those with the highest saw it fall. Both ends converged toward the average.

• The downward-sloping line in the chart shows the relationship between beginning short interest and its change.

• The biggest effect was in Palo Alto Networks (PANW), Sandisk (SNDK), Dell Technologies (DELL) and Marvell Technology (MRVL), which had beginning short interest above 4% of float and saw it fall by about 2 percentage points on average (see the 4 points at the bottom right).

Stock Return Effect: Covering on the Way Up

• Short sellers traded with momentum this year. They added to positions in the weaker performers and covered in the stronger ones.

• The downward-sloping line in the chart shows the relationship between return and short interest change.

• DELL, up more than 300%, and SNDK, up more than 500%, each saw short interest fall about 2 percentage points (see the 2 points at the bottom right).

• DELL and SNDK had among the highest beginning short interest and among the best returns this year. Their short interest fell, suggesting short sellers cut their losses.

• Short sellers usually follow a reversal pattern: they add to positions as prices rise. This year, in the biggest winners, they did the opposite and covered (bought back shares) as prices rose, a momentum pattern.

• In extreme cases, momentum covering becomes a short squeeze, a rapid price spike as short sellers rush to buy back shares. This was not a squeeze. These stocks are large and their short interest is low, so covering could not move the price, and it was spread throughout the year.

Size Effect: Very Small

• Size had only a small effect. Short interest rose slightly in the largest companies and fell in a few smaller ones.

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