Short interest in Apple soars

Based on statistics from NASDAQ, investors became extremely bearish on Apple's stock over the last few weeks with a peak in negative sentiment reached around the end of last month. Apple's short interest had been rising, not surprisingly coinciding with the sharp decline in the company's stock. Short interest represents the number of shares of Apple that have been sold short, a bearish strategy that we will explain. Right now, let's just point out that negative sentiment about a company rises with the short interest.

You know how stock market investors like to buy low and sell high? Selling short is the opposite. You borrow shares from your broker and then sell them. With this strategy, you want the stock to drop because it allows you to buy back the shares you've borrowed at a lower price. And yes, the shares do need to be bought back eventually. In fact, there is a famous saying relating to shorting. "He who sells what isn't his'n, must buy it back or go to prison." Hey, we only report these things, we don't make them up! Short interest in Apple rose from 8 million shares in April 2012 to 20 million by April 2013. During the last two weeks of April, when the shares fell sharply to $385, the short interest doubled to 41.6 million shares. Now, with the stock back up to the $445 area, the short interest has declined to 26 million shares. This means that the recent bounce off the low has been due to shorts covering their position which is not considered having the stock in the hands of strong buyers.

It might be counter-intuitive but a large short interest often is the sign of a major bottom in a stock. It means that everyone pessimistic about the stock has already sold Apple shares short. Also, since the majority of people do the wrong thing in the market, short interest is often a contrary indicator. And finally, all of those shares sold short will have to be bought back eventually. The reason why a short seller might be forced to "cover" his position has to do with margin calls. If you short a stock and it starts rising, you might have to put up more money or be forced to close out the trade.

The bottom line here is that with all of the recent bearishness over Apple, the short interest is saying that this pessimism might have gone a bit overboard. Is the Apple iWatch getting ready to turn around the company's fortunes, and those of its investors? 

source: NASDAQ via Fortune, TUAW