by Larry Swing - July 31, 2005

Education

A recent paper published in The Accounting Review found that, under certain circumstances, abnormal returns are significantly negative for firms that were recently heavily short-sold.

Grace Pownall and Paul J. Simko measure spikes in short-selling by comparing current short-sales interest in a stock to historic levels, and also to contemporaneous general-market short sale levels.  They find that significant negative abnormal returns follow short sales when:

1. The stock has little analyst coverage - especially for stocks with one or fewer analysts

OR

2. The earnings for the most recent quarter were unusually high

The authors postulate that returns are negative for these stocks following heavy short sellers because they represent circumstances where the market may be easily misled.

1. When there is little analyst coverage, stocks may be widely mispriced.  Additionally, analysts generally do not cover stocks if they have a negative opinion of the stock, so a lack of analyst coverage may be a signal of poor quality that the short-selling certifies.
2. When earnings are unusually high, the market is likely to revalue the stock upwards.  If short-sellers are actively selling, then it may mean that subsequent earnings will not sustain the momentum of the most recent report.

Reference:

"The Information Intermediary Role of Short Sellers," Grace Pownall and Paul J. Simko, The Accounting Review, Volume 80, No. 3, 2005.

Analyses of HOLDRs

BBH:  Neutral.  (Biotechnology)

BDH:  Bearish.  (Broadband)

SwingTracker
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BHH:  Bullish.  (Business to Business)

EKH:  Neutral.  (European Stocks)

HHH:  Neutral.  (Internet)

IAH:  Neutral.  (Internet Architecture)

IIH:   Neutral.  (Internet Infrastructure)

OIH:  Neutral.  (Oil Services)

PPH:  Neutral.  (Pharmaceuticals)

RKH:  Bullish on a breakout.  (Regional Banks)

RTH:  Neutral.  (Retail)

SMH:  Neutral.  (Semiconductors)

SWH:  Neutral.  (Software)

TTH:  Neutral.  (Telecommunications)

UTH:  Neutral.  (Utilities)

WMH:  Neutral.  (Wireless)

Analyses of Individual Stocks

Bullish Stocks

ODP

• Bull flag
• Positively following volume

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MrSwings Real-Time Stock Charts RISK-FREE TRIAL featuring one-click access to Larry Swing's profit-generating indicators - Force Index, EquiVolume, True Strength Index

GGC

• Symmetrical triangle breakdown
• High volume
• Poor earnings announcement