The short ratio (or short interest ratio) for a public company is derived by dividing the number of shares sold short by the average daily trading volume. It is an indicator of the prevailing sentiment the market has for a specific stock and is used by both fundamental and technical traders to identify trends.[1]
The short interest ratio can also be calculated for entire exchanges to determine the sentiment of the market as a whole. If an exchange has a high short interest ratio of around five or greater, this can be taken as a bearish signal, and vice versa.
A short squeeze can occur if the price of stock with a high short interest begins to have increased demand and a strong upward trend. To cut losses, short sellers may add to demand by buying shares to cover short positions, causing the share price to further escalate temporarily. Short squeezes are more likely to occur in stocks with small market capitalization and a small public float.[2]