When shorting a stock, there are many considerations to think about. One such consideration is how have the shorts done historically?

A research firm or a money management firm that recommends shorts typically will only short on fundamentals, sector issues, qualitative issues or a technical breakdown.

Recently on October 9^th, a rather negative research report on Monolithic Power (MPWR) which we will refer to as Monolithic for the rest of this article was issued. So far this idea is not working and we think it is only a matter of time before the shorts will have to capitulate.  The recommendation came out on October 9^th and we will use that closing price of $135.17 to track how shorts are doing on the position.  Monolithic closed today at $160.27.

Since October 9^th Monolithic has risen 18.47% through the close of November 14^th. The short is not working for those that deployed capital into the idea. In fact, this might be one of the worst examples of timing on a short that we have seen it quite a long time.  Dare we say the research note bottom ticked Monolithic.

Currently, the short selling is moderate but with a negative research note out there other short sellers may establish a short taking it to a level of heavy short selling.  Using Erlanger Research, we define short selling intensity as the range of the Erlanger Short Ratio over time. With the short intensity in hand, we can quantify how shorts do going all the way back to 1992 if it traded then.

When there is moderate short selling, on average the short sellers lose 33.92% and that happens 61.1% of the time. When the shorts make money with moderate short selling, they make 8.46% on the short. There have been 18 observations of moderate short selling since 2006.

Historically, when short selling is heavy in Monolithic the shorts when they are wrong get squeezed 46.30% and when correct make 8.80%. There have been 8 observations of heavy short selling. 62.50% of the time the shorts have been squeezed. So either way, the shorts could lose another 15.45% (moderate short intensity) or 27.83% (heavy short selling).

The ironic thing about the short squeeze in Monolithic was that it was caused by the research report. Short selling was low, 33%, before the report and then others bet against the company.  So the short recommendation created the squeeze.

Shorting stocks is a tough task but if you are missing the data to understand how shorts do from 1992 until now, then you could be playing against the casino. Which usually does not end well.

Geoff Garbacz is the co-founder and one of two principals in Quantitative Partners, Inc. (QPI).