Short Sellers Place $1 Trillion Wager on Second Half of 2023

Markets

Short interest in U.S. stocks increased during the first four months of this year. In May and June, though, they got serious. In the first six months of the year, combined short sales of $28 billion and mark-to-market increases of $110 billion pushed the short interest total to just over $1 trillion.

In a recap of short interest for the first six months of 2023, Ihor Dusaniwsky and Matthew Unterman of S3 Partners noted that short sellers were not necessarily betting that an overbought market was about to make a U-turn.

Rather, they commented, hedge funds were driving the action:

A significant portion of the short selling was due to an increase in hedge fund leverage as they increased both their long and short exposure. Hedge funds increased the total notional size of their portfolios to gain more exposure to the volatile and upward trending market.

Here is a table showing short interest by market sector, including an entry for SPACs.

Short Interest (millions)
Sector 12/30/22 Short Interest 6/30/23 Short Interest 6 Month Short Int. Change Change Shares Shorted
Comm. Services $57,367 $68,763 $11,396 $777
Cons. Discretionary $128,980 $169,457 $40,476 $8,316
Consumer Staples $44,369 $44,704 $335 −$149
Energy $68,309 $65,294 −$3,014 −$943
Financials $119,886 $127,415 $7,529 $5,630
Health Care $115,180 $119,934 $4,754 $5,866
Industrials $97,821 $114,222 $16,401 $3,269
Info. Technology $138,551 $192,593 $54,042 $749
Materials $36,824 $38,724 $1,900 $165
Real Estate $33,686 $39,259 $5,574 $5,030
Utilities $22,618 $21,040 −$1,578 −$686
Misc. (SPACs) $269 $64 −$205 −$120
Total $863,859 $1,001,470 $137,611 $27,903

Of the 10 most heavily shorted stocks at the end of June, nine are generally considered tech stocks, although Tesla, Amazon and Alibaba are consumer discretionary stocks. The columns list short interest as a percentage of the stock’s float, the percentage of the float using S3’s calculation of synthetic longs created when shorts are sold, and the dollar value of the short interest at the end of June.

Company SI % Float S3 SI % Float Short Interest (billions)
Tesla 3.47% 3.36% $25,037
Apple 0.76% 0.75% $23,115
Microsoft 0.61% 0.60% $15,107
Nvidia 1.14% 1.12% $11,404
Amazon 0.90% 0.89% $10,541
Meta Platforms 1.34% 1.32% $8,450
Visa 1.86% 1.83% $7,131
Alphabet A 0.90% 0.89% $6,346
Alibaba 2.37% 2.31% $5,202
Palo Alto Networks 6.71% 6.29% $5,160

S3’s Dusaniwsky and Unterman note that both the energy and utilities sectors saw significant short covering in the first six months of the year. Energy short sellers covered $3 billion in short bets, while utilities sector shorts covered $1.6 billion. These two sectors were only two profitable sectors over the past six months because short sellers “were actively decreasing their exposure in these two profitable sectors.”

The worst-performing sectors for short sellers were consumer discretionary stocks, down 23.27%, and technology, down 32.83%. On a mark-to-market basis, short sellers are down 13.09% for the first half of 2023.

Dusaniwsky and Unterman comment again on the rise in short sales in May and June, and what that rise means going forward:

The short side may be turning into a more stock pickers market as the crowded large cap tech names on the short-side have produced outsized mark-to-market losses and hedge funds may be looking for less crowded names to boost returns after they were under-invested in tech on the long-side for most of the year. Mid-cap and small-cap shorts such as Ralph Lauren Corp., Arbor Realty Trust Inc., Fisker Inc., CareTrust REIT Inc., and Wayfair Inc. are seeing short-side inflows while megacap and large-cap names such as Taiwan Semiconductor Inc., Alphabet Inc., Enbridge Inc., and United Health Group see continued outflows.

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