There is a lot of chatter around the Short Interest Ratio and we wanted to share some insight on this topic.
The excerpt below came from a great book by Harry D. Shultz - Bear Market Investing Strategies.
If we apply this logic to GameStop (GME), it was clearly a buy (in perfect hindsight) because the short percentage was 226% in in mid-January.
This is worth noting in the next short squeeze scenario.
Below is the annual silver/Dow Jones Industrial Average ratio from 1900 to 2021.
Short Squeeze Precedent
If silver were to experience a short squeeze on the scale of the Hunt brothers in the 1980’s, then the price of silver could rise to approximately $642 based on the Silver/Dow ratio above. This assumes the accepted clearing price of $20 for silver. However, if the price were to replicate the listed price of $50, then silver could theoretically achieve a price of $1,554.
A distinction about using the Dow Jones Industrial Average vs. the S&P 500 is that the S&P 500 didn’t exist before 1957. Therefore, all data before 1957 referring to the S&P 500 isn’t what investors and speculators used to make their decisions about the market.
A distinction about using silver instead of gold. Prior to 1971, gold did not freely float. This means that any ratio or price used before 1971 doesn’t reflect how the market perceived the price of gold. Meanwhile, silver has freely floated since 1873. This means that market sentiment was fully reflected in the price action of the metal.
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