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Short sellers are upping their attack on these ASX 200 stocks

Focusing on the most shorted stocks on our market may make interesting reading but looking at trends can be far more instructive as it can often be a good indicator of where a stock is heading.

It certainly shouldn’t be the only thing you use to help you decide on whether to buy or sell a stock but it is useful to know what short-sellers are doing as they tend to be more sophisticated investors than a typical retail investor.

Looking at the short-selling trend in a volatile market can also be particularly useful during times of uncertainty as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index emerged from October with its worse monthly loss in nearly 40 months!

Short-sellers borrow stock to sell on-market in the belief that they can buy it back at a lower price later to profit from the difference.

The stock that experienced the biggest increase in short-interest is milk products group Bellamy’s Australia Ltd (ASX: BAL) as the number of its shares out on loan to short-sellers have jumped a whopping 2.7 percentage points to 8.5% over the month.

It’s been a winning trade too with the Bellamy’s share price tanking 20% since the start of October when the top 200 stock index is down 4%.

Uncertainty over new Chinese import rules is a likely key reason why short-sellers are increasingly attacking the stock.

The company that experienced the second biggest increase in short-interest is rare-earth miner Lynas Corporation Ltd (ASX: LYC) as a dark cloud hangs over the future of its Malaysian plant with a new government running that Asian country.

The amount of shares short-sold increased 2.5 percentage points to 8.2% in October and the 35% jump in Lynas’ share price since hasn’t put off the short-sellers.

Supporters of the stock believe that the new Malaysian government will let the plant continue operating once a review is completed but it’s anyone’s guess on the outcome. It’s a battle of wills and investors and short-sellers should steel themselves for more volatility ahead.

Third on the list is satellite services company Speedcast International Ltd (ASX: SDA) as short-interest in the stock rocketed 2.4 percentage points to 9.2%.

This has also been a profitable trade for short-sellers – although just. The Speedcast share price is down 1% over the period.

On the flipside, some notable underperformers have seen short-sellers lock in profits and abandon their bearish bets.

Ignoring Myob Group Ltd (ASX: MYO) and Greencross Limited (ASX: GXL) which are under takeover offers, which explains the short drop in short-interest, stocks like Vocus Group Ltd (ASX: VOC) and CYBG PLC/IDR UNRESTR (ASX: CYB), or Clydesdale Bank, may see better days ahead as the number of shares being shorted have dropped by over 2 percentage points each.

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Motley Fool contributor Brendon Lau owns shares of CYBG Plc and Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Greencross Limited. The Motley Fool Australia has recommended 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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