John - regardless of the stock or the circumstances, I've never known quite what to deduce from that logic. I guess it all depends upon your perspective/agenda.
To whit,
a) if you're short (or simply disinterested) you might say a precipitous drop in short sales, as has been shown by HDII, is a negative because of the loss of these investors who need to cover their positions.
b) if you're long (or simply disinterested) you might say a precipitous drop in short sales, as has been shown by HDII, is a positive because there has been a clear change of sentiment of the investors who had owned over 90% of the shares sold short.
Forgive me for being simplistic but my take is that the former view is unnecessarily convoluted while the latter perspective, especially in the extreme reversal cases such as HDII, is more logical. In December, 2000 short interest was ~400K, In August, 2001 short interest was ~289K. In May of this year there was a spike to 257K. The newest short interest data, for Sept. 2002, shows short interest of ~15K shares. In 'short', a trend began almost 2 years ago which has produced a reduction in short interest by 96+%...and, more significantly, a reduction in short interest-to-volume ratio (days to cover) from 20-25 to 0.38 (98+%).
The trend is most easily viewable here viwes.com (Use '12 months' and 'in table and chart' form to view the data. You will see on the chart that for the first time in [at least] a year, the latest data shows that short interest and the 'days-to-cover' ratio has crossed below average volume.)
For a contrast, type in 'KLIC' at that site.
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In your previous posts you conveyed the thought that a) [on 3/27/02] a possible reason for the drop in short sales in March may be due to the perception that there was little profit remaining on the short side; and b) [on 4/26/02] the ongoing decline in short interest might be due to the inability for many to short a stock under $5. Unfortunately both hypotheses were quickly presented with contrary data...as the stock price continued to fall and short interest shot up to ~250K in May, 2002.
It was in your April post where you first presented the idea that you are repeating now - that 'The downside to the declining short interest is that a lot of potential buyers are gone. Every short has to buy sometime. They create a floor for the price.' Again, we're now in possession of data that, in the short term, neither the presence nor the absence of significant short interest (nor the presence or absence of the 'potential floor' this implies) has made one iota of a difference for HDII over the past ~5 months.
And on Monday of this week, two days before the new short data was reported, HDII had volume of 400K (~10X normal)...approximately 25X that which would be required for all the remaining shorts to cover.
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This is a straightforward case of invoking 'Occams Razor': apply the simplest explanation to the data presented. In this case the simplest explanation is that the vast majority of short sellers in HDII no longer perceive the pervasive negatives in the company and in the stock. And while their timing in covering their short positions over the past ~20 months has not been accurate, the rationale that their covering was based much more on a perception of a turnaround in HDII than on the horrific market conditions that were pervasive is the reasonable proposition to explain the change in short interest.
And as with insider buying (which HDII has also had in the past 6 months), significant changes in short interest often anticipates future changes in the stock by many, many months.
So while I understand your assertion about 'buyers who are gone', the larger picture and message of the short interest pattern - that the perceived downside risk in HDII is currently very low (and, conversely, the perceived upside potential quite high) - seems to me to be the most straightforward and logical interpretation of this data. |
