The silver lining in short data

Insiders can help make sense of short selling data when it is released in the middle and at the end of every month. There are three general scenarios that can arise. First, if a stock is seeing both short covering and insider buying, we have two positive pieces of information leading to a bullish consensus.

1. Bullish Consensus

Insiders typically buy when they have a positive outlook about a stock's prospects. If insider buying is taking place as short-sellers are covering, rising insider commitment can serve as confirmation of the positive signal associated with short covering. The relative levels of insider commitment and short selling can also work together. For example, a bullish consensus can take place when insiders are eager to hold onto their shares while at the same time short-sellers show little interest in the stock.

An example of a bullish consensus is found in the latest short data released by the TSX as of the end of October. As we discuss in Wednesday's morning report (available to Canadian Insider Club members), not only does Maya Gold & Silver (Sunny; MYA) have zero short interest, shorts actually threw in the towel at the end of the month. Meanwhile, insider commitment is strong thanks to a high amount of insider ownership and recent buying.

INK site users can often spot an indication of bullish consensus when the there is a divergence between the line in the Insider holdings as a percent of shares outstanding chart and the line in the percent of float shares shorted.

2. Bearish Consensus

A bearish consensus occurs when short levels are relatively high and insider commitment levels are relatively low. Canopy Growth (Mixed; WEED) provides a good example of a bearish consensus. Short interest is high and growing and the relatively low level of officer and director insider commitment as measured by our INK Edge rankings system supports the bearish case. Indeed, while the overall outlook for the stock is mixed based all three V.I.P INK Edge measures of value, insider commitment and price momentum, the high level of short interest may increase the odds of the stock underperforming

INK site users can spot the bearish consensus when the there is a convergence between the line in the Insider holdings as a percent of shares outstanding chart and the line in the percent of float share shorted.

3. Short Squeeze Trap

A short squeeze trap is the third scenario we come across with short data. This happens when short levels are high or growing significantly in a stock that has high levels of insider commitment. Home Capital Group (Sunny; HCG) is a great example. The stock surged 24% on Wednesday when it released Q3 results. A high short position in the stock likely contributed to the surge as short sellers were squeezed on the positive news. As we wrote in our Morning report of August 27th, shorts were betting against the insiders at Home Capital. In fact, the company ranks in the top 10% in terms of insider commitment.

INK site users can spot a potential short trap scenario when officer and director holding levels are high and possibly rising at the same time as the short level is high and rising. Shorting a stock can be a risky proposition at the best of times and shorting one with a high level of insider commitment is even riskier. Conviction levels should be very high before entering into such a short position.

While INK outlook categories are designed to identify groups of stocks that have the potential to out- or under-perform the market, any individual stock could surprise on the up or downside. As such, this report is not meant to be a stock-specific recommendation. Disclosure: I hold a position in Maya Gold & Silver. This article first appeared on the INK Research website.

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