The Total Short Ratio (“TSR”) shows the percentage of short sales to the total volume on the New York Stock Exchange.
As with the Public Short Ratio, the Total Short Ratio takes the contrarian view that short sellers are usually wrong. While the odd-lotters are typically the worst of the short sellers, history has shown that even the specialists tend to over-short at market bottoms.
The TSR shows investor expectations. High values indicate bearish expectations and low values indicate bullish expectations. Taking a contrarian stance, when there are high levels of shorts (many investors expect a market decline), we would expect the market to rise. Likewise, extremely low levels of short sales should indicate excessive optimism and the increased likelihood of a market decline.
The interpretation of all of the short sale indicators has become more difficult recently due to option hedging and arbitrage. However, they are still helpful in determining overall market expectations.
The following chart shows the New York Stock Exchange and a 10-week moving average of the Total Short Ratio.
I drew “buy” arrows each time investors were excessively bearish. In hindsight, each of these turned out to be excellent times to enter the market.
The Total Short Ratio is calculated by dividing the total number of short sales by the total number of buy and sell orders. Both of these figures are reported weekly (on Fridays) by the NYSE.