As with the Public Short Ratio, the Total Short Ratio takes the contrarian view that short sellers are usually wrong. While the odd lotters are typically the worst of the short sellers, history has shown that even the specialists tend to over-short at market bottoms. The TSR shows investor expectations.
High values indicate bearish expectations and low values indicate bullish expectations.
Likewise, extremely low levels of short sales should indicate excessive optimism and the increased likelihood of a market decline. The interpretation of all of the short sale indicators has become more difficult recently due to option hedging and arbitrage. However, they are still helpful in determining overall market expectations. The following chart shows the New York Stock Exchange and a 10-week moving average of the Total Short Ratio. In hindsight, each of these turned out to be excellent times to enter the market.