Focusing on the most shorted stocks on our market may make interesting reading but looking at trends can be far more instructive as it can often be a good indicator of where a stock is heading.
It certainly shouldn't be the only thing you use to help you decide on whether to buy or sell a stock but it is useful to know what short-sellers are doing as they tend to be more sophisticated investors than a typical retail investor.
Looking at the short-selling trend in a volatile market can also be particularly useful during times of uncertainty as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index emerged from October with its worse monthly loss in nearly 40 months!
Short-sellers borrow stock to sell on-market in the belief that they can buy it back at a lower price later to profit from the difference.
The stock that experienced the biggest increase in short-interest is milk products group Bellamy's Australia Ltd (ASX: BAL) as the number of its shares out on loan to short-sellers have jumped a whopping 2.7 percentage points to 8.5% over the month.
It's been a winning trade too with the Bellamy's share price tanking 20% since the start of October when the top 200 stock index is down 4%.
Uncertainty over new Chinese import rules is a likely key reason why short-sellers are increasingly attacking the stock.
The company that experienced the second biggest increase in short-interest is rare-earth miner Lynas Corporation Ltd (ASX: LYC) as a dark cloud hangs over the future of its Malaysian plant with a new government running that Asian country.
The amount of shares short-sold increased 2.5 percentage points to 8.2% in October and the 35% jump in Lynas' share price since hasn't put off the short-sellers.
Supporters of the stock believe that the new Malaysian government will let the plant continue operating once a review is completed but it's anyone's guess on the outcome. It's a battle of wills and investors and short-sellers should steel themselves for more volatility ahead.
Third on the list is satellite services company Speedcast International Ltd (ASX: SDA) as short-interest in the stock rocketed 2.4 percentage points to 9.2%.
This has also been a profitable trade for short-sellers – although just. The Speedcast share price is down 1% over the period.
On the flipside, some notable underperformers have seen short-sellers lock in profits and abandon their bearish bets.
Ignoring Myob Group Ltd (ASX: MYO) and Greencross Limited (ASX: GXL) which are under takeover offers, which explains the short drop in short-interest, stocks like Vocus Group Ltd (ASX: VOC) and CYBG PLC/IDR UNRESTR (ASX: CYB), or Clydesdale Bank, may see better days ahead as the number of shares being shorted have dropped by over 2 percentage points each.
