Are short-sellers signaling gloom for the stock market?

For the monthlong period ended August 15, short-selling surged to a record on the New York Stock Exchange, according to The Wall Street Journal. The number of open short-selling positions rose 2.7 percent from in mid-July, the paper noted, and the short ratio — the number of days’ average volume represented by the outstanding short positions — rose to 6.0 from 5.8.

Since investors who “short” a stock are betting that its price will fall, most market observers suggest that this bearish sentiment signals a drop in the stock market, but not everyone agrees.

Indeed, many sophisticated investors, such as hedge-fund managers, use this data as a contrarian indicator.

“The rationale is that if everyone is selling, then the stock is already at its low and can only move up,” explains Investopedia.com. “Thus, contrarians feel that a high short-interest ratio is bullish, because eventually there will be significant upward pressure on the stock’s price as short sellers cover their short positions.