January's ETF short interest lowest since April 2003

ETF Short Interest has once again fallen to levels not seen since April 2003. This means that investors are confident that the market is not going to decline significantly. This coincides with multi-year lows in volatility and a general complacency among traders. It will be interesting to see if the market can breakout above it's recent trading range without first experiencing a decline in order to rattle investor confidence.

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"January's level of short interest for U.S. exchange-traded funds as a percentage of shares outstanding was the lowest in nearly two years, according to a Monday report from Morgan Stanley.

The last time that ETF short interest dipped below January's level was in April 2003, when it was 500.5 million shares or 16.7 percent of shares outstanding, Morgan Stanley said.

ETF short interest peaked in March 2004 at 1.2 billion shares, or 34.3 percent of shares outstanding. Since then, it has steadily declined each month.

Short interest in publicly traded companies is normally much lower than ETFs, averaging 1 percent to 2 percent of market capitalization."

"The higher the short interest, the more investors are expecting a downturn," said Morgan Stanley analyst Deborah Fuhr. "Short positions tend to fall in value as stocks rise, and vice versa."

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