Do Daily Short Sales Forecast S&P 500 Sector Returns?

Abstract

We examine the data for S&P 500 firms for 2009 to 2012 to determine whether daily short selling, aggregated at the industry sector level, forecasts relative returns. Prior research documents short sellers as skilled fundamental analysts and information processors at the individual security level and in aggregate as forecasters of short-term market direction. Intriguingly, we find not only that sector-aggregated daily short sale information does not correctly forecast the short-term relative performance of industry sectors but rather that some
contrarian strategies that are short the least shorted sectors and long the most shorted sectors are profitable on average.