We explore business cycle variation in the relation between short interest and future stock returns. During economic expansions, firm-level short interest is a strong negative predictor of the cross-section of stock returns. In contrast, during recessions, short interest aggregated across firms is a strong negative predictor of future market returns. These findings are consistent with Kacperczyk, Van Nieuwerburgh, and Veldkamp’s (2016) model in which rational yet cognitively constrained traders collect aggregate (firm-specific) information in recessions (expansions) because these times are marked by higher (lower) aggregate volatility and price of risk.