The lack of shorts doesn't itself mean the market is going down but it does mean that should something exogenous trigger selling, the decline will not be cushioned by traders closing their shorts with a buy order.
Here's an example: On June 6, 2008 oil staged it's largest dollar gain in history. Goldman had their pension and endowment customers loaded up with fancy prop products based off long positions in the Goldman Sachs Commodity Index, an index even more heavily skewed to oil then than it is now. The GS megaphones were pitching $200 per barrel for WTI.
As retold in a June 2, 2009 post looking back to the previous summer:
...After talking to some folks who had been mauled [cute -ed] I decided that the short-sellers had just given up. It is no fun to be selling into the buying of Goldman and their long-only index clients, CalPERS, the universiy endowments et al.
So they said to hell with it. Oil continued to rise for another 35 days before peaking on July 11.
On July 29 I had this comment at Environmental Capital:
Mike @ 4:13,
Two separate thoughts in that first post.
As best as I’ve can tell approx. 40% of the move from $80 to $147 (25-28 bucks) came from “speculation”. I use quote marks because of the terminology problems most of the talking heads have when the subject is commodities. Speculators in commodity parlance take the other side of a hedgers trade, thus performing a societal good.
The problem was, until last week, the shorts had been beaten up so bad by the relentless flow of “investor” money that were out of the game. The $10.75 uptick on June 6 was their capitulation.
They covered and said screw it.
I personally don’t see any reason to allow the “investors” in markets for consumables. If they want an inflation hedge, let them run gold to a bazillion per ounce....
The decline was from that July 11, 2008 top-tick of $147.27 to its December 2008 low of $32.40 for the front month contract and $30.28 spot. That's what can happen when there are no shorts to slow the decline.
Enough history, on to Upfina, Nov 24, 2020:
Short sellers protect the market which sounds weird because many blame them for weakness. The reality is shorts mainly go after weak companies that have fundamental flaws. It’s not the messenger’s fault the flaws exist. Of course, some short on valuation, but those are trades that don’t get talked about as much. The ones that are discussed are the ones that cause stocks to crater. It’s healthier if the flaws are pointed out earlier by shorts rather than later when the problem becomes enormous. Obviously, shorts are trying to make a profit, but calling out bad practices makes a market heathier just like a controlled forest fire makes the forest healthier even though it is a painful process....
There are no shorts left! pic.twitter.com/PUReDuXTa7— jeroen blokland (@jsblokland) November 21, 2020