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A quick update from JP Morgan’s ever-stellar Funds and Liquidity team before the US market opens: the shorts are taking off their shorts.

No, no, no, not in that way but in this way, specifically, on the world’s largest ETF, and therefore largest ETF-tracker fund, the venerable SPY:

We get a similar picture in Figure 5, which shows our short interest proxy, i.e. the Quantity-On-Loan, of the SPY US Equity ETF, the biggest equity ETF in the world. Figure 5 shows that this short interest proxy had increased steeply over the course the four equity correction weeks (Figure 5), exceeding its previous high in December 2018. But this indicator reversed some of its previous increase in the previous week’s short covering rally. This past week our short interest proxy on SPY US Equity ETF appears to have risen a bit and remains firmly in oversold territory.

As last week was a relatively tepid one for US equity markets, this suggests that, as many people – including this blog – have pointed out, short selling is a net positive for markets as it provides a floor on for equity prices. Indeed, perhaps counter-intuitively, they tend to be net buyers when share prices fall. 

Even Jim Chanos, perhaps the most famous short seller of all time, admitted as much on CNBC last week, telling the hosts of the Half Time Report show that his various investment funds at Kynikos Associates had been buying stocks in the past few weeks.

Yet while short-sellers are seemingly taking profits in equities, that doesn’t seem to be so much the case in high-yield debt with over 25 per cent of the HY ETF still on loan:

Given some of the deals we’ve seen in the debt markets over the past half-decade, it’s not that much of a surprise.

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