Why Short Percent Of Float Is Meaningless For Most Popular Stocks

Short percent of float is a metric often cited by traders when discussing heavily shorted stocks that could be vulnerable to short squeezes. When it comes to using institutional short selling to make predictions about potential fundamental changes in companies, financial analytics firm S3 Partners says short volume, not short percent of float, is the more relevant metric.

The Limitations Of Short Percent Of Float

Short selling can be a great indication of what the “smart money” and Wall Street thinks of a company, said S3 analyst Ihor Dusaniwsky. But institutions won’t even bother with short-selling stocks unless they can take a $20-to-$50-million position.

“So any stock with less than a few hundred million in short interest is usually irrelevant to the Street in general and my client base in particular,” Dusaniwsky said. 

Stock with a high short percent of float tells traders the relative number of short bets versus long bets in a stock. But most stocks with extremely high short percent of floats have little institutional presence on the short side. A stock like Apple Inc. AAPL, for example, would never have a high short percent of float, even if billions of dollars of short bets were placed on the stock.

“[Short percent of float] makes some sense when looking at a small- or micro-cap name, a modicum of usefulness in mid-cap names and very little sense in large- and mega cap names,” Dusaniwsky said. 

Institutional Indicator

For investors looking for a way to use short selling as an indicator of fundamental changes at a large-cap company, Dusaniwsky said changes in short selling volume are the best place to look.

“If I see an increase of $100-$200 million in daily short interest, I know something is up in the name and serious investors (the smart money) [are] looking for the stock to go down in price for some reason,” he said. 

JJ Kinahan, chief market strategist for TD Ameritrade, said there's another reason for traders not to put too much weight in short percent of float.

“I do pay attention to short percent of float,” Kinahan said. “But you have to be careful because there’s also options plays, so you don’t know [by looking at short percent of float] if someone is using options to hedge in some way.”

The Takeaway

Short percent of float is no different than dozens of other fundamental and technical metrics. If traders understand exactly how short percent of float is calculated, they can understand its usefulness and, perhaps more importantly, its limitations.

The smartest traders don’t rely on a single number and instead incorporate dozens of technical and fundamental numbers to get the clearest possible picture of a stock's performance. 

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