Short sellers giving up on Facebook is not a bullish sign

Short interest in Facebook shares has fallen to a post-IPO low, but investors are being warned that this should not be taken as a buy signal.

The technology giant’s flotation on 17 May, which valued the social networking site at $104 billion, was one of the hotly anticipated in corporate history and didn’t disappoint in terms of drama.

The sheer demand on the opening day’s trading saw the stock market crash for half an hour, but after surging by 10% in the opening hours the shares ended the day flat. The precipitous fall that followed over the following four months saw its share price slump from its IPO value of $38 to a 4 September low of $17.73- a peak to trough fall of some 53%.34%.

Short interest in the stock has always been significant due to some investors’ concerns both about its overhyped nature and the company’s ability to monetise its userbase.

Records show that short interest was initially 8.1% of its float, peaking at 19.4% in mid-August just before the share price bottomed, falling steadily thereafter to a record low of 5.8% currently. This has coincided with a quiet rebound in Facebook’s shares, which are now up 51.2% from their bottom at $26.49%- albeit still 29.87% down from the launch price.

So, does the decline represent a sea-change in investor sentiment on the tech giant? Not according to US chartists Bespoke Investment.

‘Facebook has quietly gained back half of its decline from its $38 IPO price since it bottomed out in early September. As the stock has rallied, short sellers have been running for the exits,’ the group said. ‘The most recent short interest figures for Facebook showed just 5.8% of its float sold short. Early on during the stock's current rally, short covering provided a big boost.  

‘Unfortunately for Facebook bulls, there are now a lot less shorts out there to potentially cover, which makes it more difficult for the stock to rally. Gains going forward will have to come from new buyers stepping in instead of short sellers throwing in the towel.’

With so many investors having been burned in the IPO and investors still concerned about the company's model, it may take a sea-change in sentiment towards Facebook for share price recovery to continue now one crucial leg of support has been removed.