Short Interest Spike Could Mean Losses Ahead: Analyst

Shorting stocks, which allow speculators to profit from falling stock prices, seems to be on the rise, he added.

Earnings season kicks off with Alcoa , which reports after the bell Tuesday.

"While we shouldn’t get carried away…4.5 percent of its shares are short and there’s been a big increase in Alcoa short interest in the last couple of weeks," he said. "That’s pretty ominous, I’d say."

It isn't unusual to see short covering ahead of earnings, he said, because "people are taking a bit of risk off the table and they can short again on the day the results are very bad."

Semiconductors is the number one sector being shorted, followed by commercial services and supplies, he said. Short positions have been increasing in resources stocks, because of a potential slowdown in China, and in the materials sector and steel company stocks, Gordon said.

As for other individual stocks, he sees an increase in short covering for Safeway , at a bit short of 9 percent of its shares, and also in toymaker Mattel .

"Investors think toys are going to be thrown everywhere," he said. "We’ve seen a 350 percent increase in the short selling in Mattel in the last couple of months."


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Disclosure information was not available for William Duff Gordon or his company.