The short position can help drive stocks higher as short-sellers cover their position in the face of momentum or incrementally improving fundamentals.
But to the extent that the stock price is only a result of this type of buying, stocks can be left at levels that are priced for perfection and flawless execution.
Panic buying and short squeezes have been the catalysts sending a number of Internet stocks to levels that are priced for perfection, and flawless execution.
The short-interest factor is reaching new highs in March, suggesting increasing pessimism but providing some explanation for why certain Internet names have made what many market observers would call exaggerated gains in recent weeks, and continue to do so.
Recent figures from Nasdaq shows that short interest on a number of Internet names have hit the highest levels seen in the last few months -- or, in some cases, in the last year.
For instance, as of mid-March, short interest in Hotels.com (ROOM: news, chart, profile) stood at its highest level since November.
At the current short interest level, nearly half of Hotels.com's float -- the shares that trade -- are held in a short position. This is one of the reasons for shares' gains in recent weeks.
All told, the stock is up 55 percent since hitting a recent low point in the $39 range in mid-February.
The recent proposal by USA Interactive (USAI: news, chart, profile) proposal to buy up the publicly traded shares of Expedia (EXPE: news, chart, profile) that it didn't already own has sparked speculation that USA would consolidate its position in majority-owned Hotels.com as well.
Netflix (NFLX: news, chart, profile), the popular DVD rental company, is another case in point illustrating the effect of short interest, at its highest level in a year. After finishing out the year well below its June 2002 initial public offering price, the stock is up 79 percent for 2003, including up 20 percent since the end of February.
Short interest in Ask Jeeves (ASKJ: news, chart, profile) surged in the four weeks through mid-March. Its short interest jumped threefold to its highest level in the last 12 months. Ask Jeeves is up 170 percent this year.
Bellwethers
Similarly, EBay (EBAY: news, chart, profile) has seen short interest climb to its highest level since September. Shares are up, yet again, adding nearly 1 percent to $89.38, translating into an advance of 32 percent since the start of the year. EBay hit a 52-week apex of $89.79 on Friday.
The short interest in Yahoo (YHOO: news, chart, profile), however, is not as high as prior months. It's higher than it was in January but below December levels.
Meanwhile, Amazon.com's short interest has been rising since January, and is now at its highest level since last November.
Amazon.com (AMZN: news, chart, profile) rose nearly 1 percent in Wednesday's trading to $27.10. The price, while below the 52-week high of $27.86 struck on Firday, is still up 44 percent for the year.
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