We present evidence that short sellers pick stocks during expansions and market-time during recessions. First, firm-level short interest is a stronger negative predictor of the cross-section of stock returns during expansions than recessions. High short interest also only predicts negative future earnings announcement returns during expansions. We attribute these findings to short sellers collecting firm-specific signals. Second, short sellers appear to make factor bets more so during recessions than expansions. These bets tend to pay off as we observe a strong negative relation between the betas of highly shorted stocks and future stock market returns, but only during recessions.
Peter N. Dixon and Eric K. Kelley