Short Interest Surge May Not Signal Decline

As stocks surged by more than 9 percent in September, short sellers increased their bets, bringing short interest to its highest levels yet this year.

In other words, the total number of shares of company that have been sold short were at very high levels in September. As shown in the chart below, some of the highest-flying stocks in September had some of the biggest percentage increases in short interest.

So was the September rally simply a short squeeze for these stocks? Not at all, said Kevin Pleines, an equity market analyst at Birinyi Associates. The amount of stock sold short among all US companies represents 3.8 percent of shares available for trading. Short sellers borrow stock to sell in hopes it will come down, which allows them to sell for a lower price to the share holder.

But despite the sharp increase in short interest in the stocks listed above, all of them saw gains of more than 25 percent.

"This leads us to call into question the bears’ suggestion that the September rally is due in part because of short covering," Pleines told the "Fast Money" desk.

Watch the video to see the full interview with Pleines.

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Trader disclosure: On Sept. 29, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova Owns (APA), (AAPL), (ARUN), (BMO), (C), (IBM), (HES), (JOYG), (XBI), (FTO), (OXY), (ORCL), (PEP), (POT), (RSH), (SU), (RIG), (UPL), (VRTS); Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST)

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