What does a high level of short interest typically indicate for investors?

A high level of short interest typically indicates that a significant number of investors believe a stock's price will decline. This level of pessimism can suggest that the stock is currently oversold. As a result, when everyone is heavily shorting a stock, it can lead to a potential short squeeze, where short sellers are forced to buy back shares to cover their positions as the price rises unexpectedly. This buying activity can lead to a price increase, which is what makes it a potentially good signal for other investors to consider buying.

A high short interest may also indicate that negative sentiment is built into the stock's price, meaning that if the stock a) does not decline as expected or b) shows positive news or financial improvements, the price could rise significantly. Investors who can recognize this situation may find an opportunity to buy in at a lower price before a potential uptick in the asset's value due to a change in market sentiment or a catalyst that favorably shifts the outlook for the stock.