Short-selling interest in S&P 500 stocks has reached its highest since November last year as investors piled on bearish bets in the past month, underlining the scale of the sharp switch in market sentiment.
Short sellers such as hedge funds aim to profit from falling prices by borrowing stocks to sell and betting that prices will fall before they have to buy them back to unwind the loan.
Until last month, shorting interest had fallen to its lowest since at least 2008, according to Data Explorers, which tracks stock out on loan, considered a proxy for shorting activity.
But in the past month, loans have risen and now more than 3 per cent of the index’s total market capitalisation is out on loan, the group said.
The data suggest the ardour of so-called “shorts” could be returning after nearly three years when they have been blocked first by temporary short-selling bans imposed in the wake of Lehman Brothers’ collapse and, since 2009, by a bull market that has made it harder to pull off negative bets.
The fast turnround also suggests that the hedge funds who make up the bulk of the short selling world were as caught out as other investors by the turmoil of the past month and had not pre-placed short positions.
“It seems they were positioned for growth and did not anticipate the extent macroeconomic uncertainty would trample over stock prices,” said Will Duff Gordon, research director at Data Explorers
Data Explorers’ “Long-Short” ratio – which tracks the value of stock available for loan against the value of stock on loan – backs up the sharp turnround: the ratio has dropped to 10.85 times, as of Monday, down from 12.3 at the start of last month. A falling ratio implies rising bearishness.
Stocks did however begin a rally last week after three weeks of virtually unrelieved selling, but watchers warn that investors appear wary of committing themselves to further gains.
“People don’t believe this rally is going to persist,” said Dan Greenhaus, chief market strategist at brokerage BTIG.
“If you’re someone who believes we’re rallying in the hopes of the Fed meeting in September, you’re going to take an opportunity to hedge your position [with shorts] or bet on some level of disappointment.”
The Federal Reserve is due to hold an unusual two-day meeting beginning on September 20. Speculation has risen that the Fed may be considering new ways to boost the flagging economy.
Large speculators added to their shorts in the S&P 500 futures to roughly $24.6bn notional from $21.5bn last week, according to Bank of America Merrill Lynch.
“Readings are [showing] a crowded short [position] for the first time since June 2008,” said analysts at the bank.
S&P 500 futures are most short since mid-2008, and nearly since late 2007, having easily passed the peaks reached following a market correction on May last year, according to data from the Commodity Futures Trading Commission collected last week.