Short positions in US stocks have dropped to their lowest level in more than a decade, as this year’s record-breaking rally inflicts big losses on investors seeking to profit from declining share prices.
Short interest as a proportion of market capitalisation for the median stock in the S&P 500 index fell to 1.8 per cent at the beginning of this month, according to figures from Goldman Sachs, the lowest since the bank began tracking the data in the 2004. That compares to 2 per cent at the start of the year, and an average of 2.4 per cent over the past 15 years.
For tech and health stocks, the year’s best performing sectors, short positions relative to market value now stand at or close to the lowest level for the period analysed by the bank.
The US stock market tumbled earlier this year as the Covid-19 pandemic spread around the globe. From the previous market peak in February to its lows in early March, short positions notched up paper gains of $375bn, according to S3 Partners, a data provider.
But stocks have since rebounded sharply, adding more than 50 per cent to the value of the S&P 500, taking it to a record closing high last week. Mark-to-market losses on short positions now sit at $383.5bn since the March lows.
Stocks with the biggest amount of short interest have fared better than those with the least, intensifying the blow for short sellers, according to IHS Markit, a data provider.
“Similar results may be expected for the small-cap universe . . . but observing the same in the large-cap space is striking,” said Sam Pierson, director or securities finance for IHS Markit. “The rally has been a challenging time for directional short selling.”
Bets against Amazon, Apple and Facebook, three of the top five largest companies in the S&P 500, are among the worst-performing for short-sellers this year as tech-focused giants have powered the rally.
Investors betting against Amazon have weathered paper losses of $4.6bn as the stock has jumped 51 per cent since February, while those waging on a fall in Facebook shares are down $1.6bn for the period, according to S3.
Those positioned for a drop in Apple’s stock falling have lost $4bn in that time. Last week the iPhone maker became the first US company to hit a market capitalisation of $2tn, just two years after breaking the $1tn mark.
Tesla, which is not in the S&P 500, has been the worst short bet across the US market since the February peak. Short sellers have suffered paper losses of $13.8bn, according to S3 data, as the carmaker’s stock has soared more than 120 per cent over the period to close at a record high on Friday.
Elon Musk, chief executive of Tesla, has for years sparred with investors betting against the company’s stock and lost month taunted short sellers as the company’s stock rose by selling red satin shorts on Tesla’s website.
But as tech stocks have rallied, many other sectors have been left behind.
Share prices of a fifth of S&P 500 companies were more than 50 per cent below their all-time highs at the close on Friday, while the average stock in the index is 28.4 per cent below its peak, according to Cornerstone Macro, a research group.