COTW: A Short Squeeze to Remember

COTW: A Short Squeeze to Remember

The chart below can be downloaded here


The Thomson Reuters U.S. Most Shorted Index tracks the performance of U.S. stocks with the highest short interest. The index is currently comprised of 49 securities each with an approximate weight of 2%. Since mid-April, the index has outperformed the S&P 500 by a breathtaking 15% (+19% vs. +4% for the S&P 500).  Putting that in context, a simple ratio of the two indexes is currently greater than one standard deviation from its trend-line (tied for the widest divergence since inception).  In addition, the Most Shorted Index sits at an all-time high while the S&P 500 remains about 4% below it’s all-time high set on January 26.


The Index has a total market capitalization of just over $300 billion (see chart below for the five constituents with the greatest market capitalization), but a median market capitalization of just $2.5 billion.  We believe this is partly behind the spectacular outperformance of  smaller cap companies vs. their larger peers. Other reasons include the stronger U.S. dollar and trade tariffs hurting multi-national companies at the competitive benefit of smaller companies. 


As the second quarter comes to a close, the performance differential of fundamentally challenged and less stable companies relative to the broad market comes at an interesting juncture. Earnings season begins in just a few weeks and will help determine if this recent relative outperformance is justified.


H/t to Callum Thomas for first bringing this index to our attention.



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