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Short sellers are retreating from these beaten down S&P/ASX 200 shares

Don’t be fooled into thinking the turmoil is over as our share market stages a nice rally today with the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index jumping 1.1% in the last hour of trade.

Almost all sectors outside of the mining-heavy materials sector are trading higher but I don’t think the pieces are in place for a sustainable bounce just yet although I think this could change in a few weeks.

This doesn’t mean you shouldn’t be gradually stepping back into the market as picking the bottom of any sell-off is a mug’s game.

Those looking for opportunities might be keen to see what stocks short sellers are losing their interest in as such shares tend to outperform.

Short sellers are traders who borrow a stock to sell on-market with the aim of buying it back at a lower price down the track.

These traders tend to be more sophisticated than the everyday investor, and if they are reducing their bearish bets against a listed company, it’s a good sign that the stock may be close to bottoming.

What’s interesting is that the stocks that have experienced the biggest drop in short interest in the latest ASIC data are among the ugliest dogs on the ASX 200.

Top of the list is electronics and home furnishings retailer Harvey Norman Holdings Limited (ASX: HVN). The number of its shares that are loaned out to short-sellers have plunged 5.2 percentage points for the month to October 11 (ASIC’s data is always a week behind).

Short-sellers had been targeting the stock as the falling housing market, online competition and questions about its accounting practices have pressured the stock, which is down 13% for the year.

However, as short-sellers have closed their positions over the month, the share price of Harvey Norman outperformed with a near 1% rise when the ASX 200 slipped 2% into the red.

There’s only 0.9% of its total shares that short sold as of last Thursday, and while that’s good news for shareholders, bargain hunters shouldn’t get too excited just yet.

The sharp drop in short-interest could be due to a share recall by the lender (usually an institutional investor) ahead of the Annual General Meeting season as the lender may need the shares back to vote at the meeting.

I am not looking to buy Harvey Norman shares even though the stock is looking cheap by historical standards. I prefer JB Hi-Fi Limited (ASX: JBH) instead if I thought the sector had turned a corner.

The stock with the second biggest drop in short-interest is embattled telecom services group Vocus Group Ltd (ASX: VOC).

The stock has found favour in recent times (and that may explain why short-sellers have been convinced to close positions) but its more than 40% plunge over the past two years makes Telstra Corporation Ltd (ASX: TLS) look good!

Short-interest in Vocus has declined by 2.7 percentage points to 6.3% over the month to October 11. While some brokers think Vocus has bounced above fair value at $3.22, I think the stock is likely to hold on to its gains from here.

But while Vocus and Harvey Norman may have found their feet, I don’t classify them as “buys”. If you are looking for attractive stock opportunities, you will need to look elsewhere.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited and Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Vocus Communications Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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