Crazy Chester followed me and he caught me in the fog.
I’ve had that lyric stuck in my head. As it turned out in the song by The Band, Chester wanted him to take Jack the dog. I like this version with Dave Matthews and Lukas and Micah Nelson and Nathaniel Rateliff.
The stock market has been a little like Crazy Chester in the fog. One minute you think you’re going to get a beating and the next you’ve got a pet (listen to the song!).
Or vice versa. SPY, the Exchange Traded Fund (ETF) proxy for the S&P 500, was up 9.9% over the nine days ended last Friday, the best stretch in something like twenty years.
How did the stock market rise 10%? On the biggest Short Volume we’ve ever seen.
Does that matter? We’ll find out. Before we get to that, ground rules:
Short Volume is not Short Interest. That latter measure has been reported twice monthly since the Federal Reserve began requiring it in 1974 so margin trading could be counted in the money supply. It’s not an SEC metric. How many of you have stuff from 1974? How many of you were even around in 1974?
Short Volume comes from the Modified Uptick Rule, Reg SHO Rule 201, in 2011. Trades are long, short, or exempt from the rules. Few tare, so volume is long or short.
If you want to buy, say, a T-shirt, there’s got to be one to buy. In the stock market, contrary to widely held belief, like sell in May and go away (also passe), you don’t need a seller in order to be a buyer.
You need a broker-dealer with a market-making exemption from short-locate rules. Let’s say a trade for 100 shares of MSFT hits the market. Nobody is selling MSFT, but the SEC rules governing the “continuous auction” constituting our stock market say, “Fill that trade.”
So Citadel, JP Morgan or somebody does. The broker just…creates stock. To fill the trade.
We can see it. Before MSFT reported earnings after the close Apr 30, Short Volume in MSFT rose from 32.7% (of its daily trading volume) Apr 22 as the rally in equities kicked off, to 50.1% Apr 30.
MSFT is up 11% in a week. Brokers created shares for buyers ahead of earnings. The supply of stock didn’t come from sellers. Seems crazy like Chester, right?
Stay with me.
In the S&P 500, the five-day average short volume is 54%. That’s the highest we’ve ever recorded. Yes, it means just 46% of volume is long, owned by someone.
The last record so far as we know – in literally the history of Regulation National Market System – was set Sep 21, 2022.
Recall that 2022 was a bear market. The S&P 500 dropped from about 4,775 in January in a series of accelerating swoons to about 3,569 around options-expirations June 16. Then it became Chester’s dog Jack, your best friend, and soared into August expirations.
Then stocks plunged from mid-August to September 30, 2022. And Short Volume hit a then modern-day record of 52.7% of S&P 500 volume September 21.
Remember meme stocks? GME had Short Volume of well over 50% from March 2021 to its post-Pandemic low in May 2024, the rise and fall. Ahead of a recent surge, Short Volume in GME shot up to 70.2% of its trading volume Apr 3.
It’s like quantitative easing (speaking of which the Fed Open Market Committee meeting concludes today and Jay Powell will step to the mic and we’ll feel like Chester is following us into the fog). Like money that’s manufactured by government rather than earned through output, market-making short volume is fake liquidity.
None of us know what’s coming. But if market-makers created high, so to speak, they need to uncreate low. It sounds like Crazy Chester talking. But all of us in the stock market – investors, public companies, traders – need to understand the market the way it works now.
The Tariff Tantrum that followed President Trump’s self-declared Liberation Day April 2 was a sort of meme stock moment for the entire market. Stocks jumped on buying unsupported by selling.
And it looks like ETFs were behind it. That is, brokers are supplying shares to big ETF runners like Blackrock, State Street, Invesco. But they’re getting stocks by creating them, side-stepping short-locate rules.
What’s the problem with that? If stocks rise because supply increases to meet demand, what happens when they stop rising? Excess supply drags down prices.
Tim, if the record high Short Volume signaled the end of the 2022 bear market, could it be the same thing here?
Sure. But the Short record in 2022 came at the bottom of the market, not at the nexus of a short, sharp runup. Excess supply may swamp us.
Investors, Short Volume is half our crucial Demand/Supply picture. You should know what it’s doing everywhere – in stocks before earnings, in your portfolios, in the market.
And public companies, we can see long/short bets in your stock at earnings, with deals, at options-expirations, index-rebalances – anytime. Why wonder?
Don’t carry the weight around. Take a load off. Let us help.
