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.
