August 18, 2008 by admin
Days to Cover - Market Sentiment Ratio
Definition of Days to Cover
Days to cover is a formula which tracks the number of shares short in the market relative to the available float. This allows a trader to see how bearish or bullish traders are on a security. The last component of the ratio is the amount of daily volume. If you know the number of shares short and compare that to the average daily volume, you can estimate how long it would take for the short sellers to exit their positions. This ratio gives a trader a rough estimate of how much buying pressure is present in the market for a security.
Formula for Days to Cover
The below formula displays how to calculate the days to cover ratio:
Where to find Short Interest Data
Short interest data is tracked daily by the major exchanges, but is only released bi-weekly to the public. The best place to find the days to cover data is http://www.shortsqueeze.com/Â The site has a simple tool that works like a ticker where you type in a symbol and it returns the days to cover information and a number of other ratios. The beauty of this is you do not have to go to multiple websites to get the days to cover information from each exchange.
How to trade with this Information
The days to cover does provide some insight into the strength of a potential short squeeze. Stocks that have double digit days to cover ratios are often prime targets for speculators. But, traders have to realize that every stock that has been beaten appears ready for a bounce. To simply look at the days to cover ratio and buy the stocks with the highest number is a recipe for disaster. Traders have to not only look at the ratio, but also the technical formation which precedes your entry. If you see climatic volume and a sharp price reversal, odds are you may have a good entry.
Short Interest Table
Below is a short interest table for Federal Home Loan Mortgage Corporation (FNM). Notice how the stock had a days to cover value of 9.21 at the end of May which ultimately led to swift sell off.
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