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Technology Stocks : Metatools (MTLS) - looking for discussion
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To: Damon Pham who wrote (269)6/2/1997 6:00:00 PM
From: earthling   of 281
 
Re: Is a growing amount of interest a bullish or a bearish indicator?

Check out the Motley Fool Investment Guide, p. 198:
"While high short interest _looks_ like a bearish sign, it's actually a bullish indicator."

Sounds counterintuitive, but think about it. Yes, lots of shorts means that lots of people (or a few people with lots of shares) feel that the stock will fall. But the effect of these people on the stock price has already been factored into the current price, since they've already sold their shares.

Mind you--I'm just talking about the effect of these shorters' future actions on the stock price. It can only be to drive the price upward, since all the existing shorts represent future demands to buy. As for the effect of a large short position on the psychology surrounding the stock, that's another issue altogether. I would certainly agree that the existence of a lot of shorts represents a pessimistic vote about the future of the stock. But that doesn't mean that this vote is a good predictor. If a growing short position really meant that a stock really did have negative prospects, then it would make sense to just go around shorting stocks with growing short positions. I guess that would constitute some sort of "negative momentum" theory--perhaps someone out there is doing it successfully but I highly doubt it.

Another theory: Perhaps lots of discussion of technical analysis issues on a thread is a sign of a bit of inefficiency, i.e. opportunity. Rationale: technical analysis is a distraction from fundamental analysis. Any takers?
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