(NYSE corrects short interest as percent of shares outstanding to 4.66 percent in paragraph 13)
(Adds analyst comments, background)
By Phil Wahba
NEW YORK, Aug 26 (Reuters) - Short interest dipped on the Nasdaq and New York Stock Exchange in the first half of August, suggesting investors may think the worst of the market downturn may be over.
In particular, investors cut short positions in financial shares, but increased their negative bets on some Canadian resources stocks, partly reflecting a recovery in bank shares and a drop in commodity prices in recent weeks.
But some of the decline in shorts on financial shares may have been triggered by the U.S. Securities and Exchange Commission’s introduction of an emergency rule from July 21 to Aug. 12 requiring short sellers to pre-borrow stock in 19 major financial firms before executing a short trade.
From July 31 to Aug. 15, short interest fell 5.7 percent on the Nasdaq and fell 2.8 percent on the NYSE.
“The shorts are becoming more bullish and are cashing out,” said Dylan Wetherill, president and founder of short interest tracking website ShortSqueeze.com. “If the markets continue to improve, we’ll see the pace of buying accelerate.”
Investors who sell securities “short” profit from betting that they will fall. Short-sellers borrow shares and sell them, waiting for the stock to fall so they can buy them at a lower price, return them to the lender and pocket the difference.
This is the second two-week period in a row in which short interest has fallen on both exchanges. Prior to the two most recent periods, the NYSE short interest had not fallen since March, while the Nasdaq had been holding steady or rising since April, according to bi-monthly data released by the exchanges.
“It’s looking as though their focus is changing away from financials,” Wetherill said.
On the NYSE, four of the five largest increases in short positions were in resources company. Short positions in Barrick Gold Corp ABX.N and Potash Corp of Saskatchewan POT.N more than doubled, while they shot up 72 percent in Yamana Gold Inc (AUY.N).
Meanwhile, short positions in several banks that had been the object of the SEC restrictions fell dramatically. For example, short positions in Washington Mutual Inc (WM.N) fell nearly 80 percent and in National City Corporation NCC.N they dropped by more than 90 percent.
According to Harry Strunk, a principal with Treflie Capital Management, major short sellers are having their best year since 2002, partly on the back of gains from shorting financial stocks. They are now wary of trying to repeat the feat given regulatory moves to rescue ailing financial firms.
“They want to protect their profits,” Strunk said. “They saw the Fed backing financial stocks, and when you have the Fed backing something, you don’t fight it.”
As of Aug. 15, short interest on the NYSE fell to about 17.8 billion shares from 18.3 billion as of July 31. Short interest as of Aug. 15 was equal to 4.66 percent of the total shares outstanding on the NYSE, the exchange said.
On Nasdaq, short interest fell to 10.15 billion shares from 10.76 billion as of July 31. The Nasdaq’s short ratio, or the average number of days it would take to cover the outstanding short positions, climbed to 4.54 days from 4.42 in late July. (Editing by Braden Reddall, Dave Zimmerman)