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Overview
The Public Short Ratio ("PSR") shows the relationship between the number of public short
sales and the total number of short sales. (The Public Short Ratio is sometimes referred
to as the non-member short ratio.)
Interpretation
The interpretation of the PSR assumes one premise: that of the short sellers, the public is
the worst (well, except for the odd lot traders whose indicators begin with the
Odd Lot Balance Index). If this is true, then we should
buy when the public is shorting and sell when the public is long. Historically, this
premise has held true.
Generally speaking, the higher the PSR, the more bearish the public, and the more likely
prices will increase (given the above premise). Historically, it has been considered
bullish when the 10-week moving average of the PSR is above 25% and bearish when the moving
average is below 25%. The further the moving average is in the bullish or bearish
territory, the more likely it is that a correction/ rally will take place. Also, the
longer the indicator is in the bullish/bearish territory, the better the chances of a
market move. For more information on the PSR, I suggest reading the discussion on the
non-member short ratio in Stock Market Logic,
by Norman G. Fosback.
Example
The following chart shows the New York Stock
Exchange Index and a 10-week moving average of the Public Short Ratio.
The PSR dropped below 25% into bearish territory at the point labeled "A." Over the next
several months, the PSR continued to move lower as the public became more and more
bullish. During this period, prices surged upward adding to the bullish frenzy. The
subsequent crash of 1987 gave the public a strong dose of reality.
Since the crash of 1987, the PSR has remained high, telling us that the public doesn't
expect higher prices--a bullish sign.
Calculation
The Public Short Ratio is calculated by dividing the number of public short sales by the
total number of short sales. The result is the percent-age of public shorts.
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