What do short sales tell us?

Often depicted as exploitative, greedy and often both, short sellers have a terrible reputation. It's easy to understand why; long investors share in the success of a business while short sellers make money from failure. They are the pushers and the pimps of the investment world.

Yet they play a pivotal role in efficient markets and, every now and then, it's worth checking what short sellers are up to. This isn't necessarily a hunt for investment ideas; it's about understanding how the market thinks.

In that spirit, here are the top 10 most shorted stocks as of Monday;

1. JB Hifi
2. iShares Small Ords index
3. Myer
4. Cochlear
5. Fairfax
6. Flight Centre
7. Lynas
8. David Jones
9. Billabong
10. Carsales

Does this list tell us anything interesting? Four of the ten are retailers; take out the iShares index, add Flight Centre and even more of the list becomes retail based. Clearly, the retail sector is over represented here. Contrarians shouldn't see this as an automatic buy sign. Parts of the retail sector are undergoing severe structural change and there are good reasons to be shorting. The fact that Harvey Norman is off the list surprises me more than JB Hifi topping it. But there is a world of difference in what ails electrical retailers and the woes of David Jones. At some point, the more resilient retail franchises will be worth revisiting.

Cochlear at number 4 is a surprise. The shorters are betting that the recent recall is more serious than it appears. Fairfax, in my opinion, fairly deserves to be on any short list and the Lynas position, which is subject to a binary outcome from Malaysian courts, is understandable. Carsales rounding out the top ten is another surprise. It exposes how little I know about this business. But confronting doubt is partly what this exercise is about. If only eliminating doubt was as easy as conjuring it.