Who Let the Bears Out? Understanding Freeport-McMoRan’s Short Positions
What Might Freeport-McMoRan's 1Q16 Earnings Unearth for Investors?
Bears circling Freeport?
Before we start analyzing Freeport-McMoRan’s (FCX) short positions, let’s get familiar with a few key terms. “Short interest” refers to the number of shares that have been short sold. Exchanges release the short interest on a fortnightly basis. Otherwise put, short interest expresses the general market mood with regard to a particular security.
Short-interest ratio
From the short interest, we derive the short-interest ratio, which is short interest divided by average daily traded volume. The short-interest ratio and the short-interest-to-market-capitalization ratio basically standardize short interest. It’s natural that more liquid and large companies can have high absolute short interest. Therefore, we standardize short interest to market capitalization or to trading volumes (VOO).
Current position
In January 2016, Freeport’s short-interest ratio was at its highest point since the height of the global financial crisis of 2008–2009. This is not surprising as markets started factoring in a chance of a global recession this year after poor Chinese economic data spooked global markets in the first trading week of 2016. Miners (XME) including Teck Resources (TCK), Southern Copper (SCCO), and BHP Billiton (BHP) drifted to lower price levels on fears of a global recession.
However, things started to change a bit in February. Freeport’s shorts got caught in what’s known as a “short squeeze” and had to square off its positions as prices rose.
But Freeport’s short-interest ratio rose in the most recent update as of March 31. For this reason, the bears could be licking their chops for Freeport ahead of the company’s 1Q16 earnings. However, higher short positions before earnings releases can also trigger a typical short squeeze if earnings surprise on the upside.
Meanwhile, along with technical trading parameters, you should also look at Freeport’s fundamental valuation multiples. We’ll do that in the next part.
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