Short Story

To those who chart and prognosticate the course of the stock market, statistical barometers are as essential as riddles were to more classic oracles. One of the most widely noted statistics is the short interest, i.e., sales of borrowed stock* made in expectation of purchasing it later at a lower price. Last week the New York Stock Exchange announced that the short interest had risen by midmonth to 4,460,660 shares, highest since Sept. 11, 1931, partly because of arbitraging following A.T. & T.'s rights offering. The percentage of shares short is far below 1931. since over 3 1/2-times as many are now listed.

To amateur investors, a large short interest seems bearish, since it shows that a lot of investors think the market is headed down. But to sophisticated investors, a high short interest is usually regarded as just the opposite. Since the market has already absorbed the selling, they reason that the buying of stocks to cover the sales can send the market up; if the market goes down, the buying will also provide a cushion. Furthermore, Wall Streeters believe that much of the increase in short selling has been done by amateurs prompted more by recession talk than by any expert market knowledge. "The high short interest," said Manhattan Broker Jack J. Dreyfus Jr., "signifies that bearishness abounds in the barbershops."

In the past, the arrival of the barbershop bears has often indicated an upturn in the market. In May 1949, the short interest hit a 16-year peak of 1,629,551 shares, just before the market began to rise. In September 1954, the short interest rose to a 22 1/2-year high of 3,351,826, just before the Dow-Jones industrials soared (see chart). Stocks of Polaroid and

Lorillard, which had two of the steepest jumps in the short interest, demonstrated how fast-rising stocks attract newborn bears on the theory that stocks which rise sharply will sell off. The short interest in Polaroid rose from 83,441 to 122,967 shares for the month ending March 14; Lorillard from 25,380 to 58,560. But short selling in Polaroid and Lorillard, said Edmund W. Tabell, top market analyst of Walston & Co., "has been for the most part uninformed. Unsophisticated investors read of a phenomenal price rise in the papers and sell short, but they are selling against rising earnings."

* To get stock to deliver, short sellers borrow it from brokers. When there is only a small amount of stock available, the short seller sometimes has to pay a premium to borrow it. Furthermore, since the lender is entitled to all dividends declared by the corporation, the short seller must himself pay the amount of the dividends to the lender. One other drawback: all profits from short selling are short-term gains for tax purposes.

This file is automatically generated by a robot program, so reader's discretion is required.