For those interested in the “vagaries of the short term nature...

For those interested in the “vagaries of the short term nature of the market” I have provided the following update on shorting activity. Pokermanpat please don’t feel the need to read.

Data is continuing to validate and support my last post which said, in summary, that the shorters knew that EWC would be excluded from the MSCI small cap index some time ago. I can only speculate now that they will continue to increase their short exposure in an endeavour to push down the price in an attempt to buy the short stock back at the lowest price they can at the expected date of exclusion, being 30^th November.

However, I will note that the last time this occurred the crossings appeared to be done a day earlier than expected and this may have been done to ensure the broker doing the transaction delivered the shares to their favoured clients (the shorters). I will also note that they paid 33 cents which was above the then current market price of 30 cents.

Supporting data includes the following:

The shorters were covering until around mid-October. Gross shorts were virtually zero for a considerable time and net shorts were falling. Maybe they took the view that EWC was making progress. I believe they are pretty well informed, so if true, this is a good signal to investors.

Around the middle of October, which is when the broker analysts would be running the numbers on which companies would be excluded from the indexes for November, shorting resumed. It continued through to the end of October. Gross shorts increased as a percentage of total market turnover to around (30%) from virtually 0% and net shorts increasing around 500,000 shares but being reported 4 days delayed.

Since the beginning of November this activity has increased even more dramatically.

Currently, the gross shorts are tracking at an average of 45% of the market turnover and 80% of the gross shorts are turning into net shorts i.e. the net shorts are going up by around 80% of the gross shorts each day.

Since the beginning of November, this activity has led to an increase in net short of 1 mill (data is 4 days delayed). If we project this forward to today then the estimated increase in net short up is 2 mill over the two week period. This compares to an increase of 500,000 over the previous 2 weeks since the middle of October which is when the shorters reversed their buying to selling. The short activity is clearly increasing as we get closer to the index changes at the end of this month.

In addition, as I previously mentioned, the shorters seem to provide misleading data at times. This is now evident again (however I can easily adjust this to get the trends).

It wouldn’t be surprising if this shorting carried on until the end of the month. The only way to know how much more could be sold would be to know which funds holding EWC are index (e.g. passive or ETF’s) funds and which of those are measured against the MSCI indexes that EWC is exiting from. An estimate can be made by looking at the list of shareholders. Some of the funds are well known index funds.  Using this as a base I expect that at least 10 to 12 mill shares could come out of the index. If this is correct then we may expect the shorters to continue to short at least another 3 to 5 million shares over the next two weeks.

Happy hunting for investors, the next two weeks could be very rewarding particularly if EWC announces a connection.