Oct 19, 2020 - Economy

Short sellers are rushing back in

Data: S3 Partners; Chart: Axios Visuals

With the stock market again rising toward record highs, short sellers are moving back into technology shares and broad U.S. indexes with increasing confidence, betting that prices will fall and they will profit.

What's happening: After largely cashing out their bets at the end of the first quarter following the market crash in late March and pulling back in July and August, the renewed rise in stock prices has bears upping their bets again.

The backdrop: Stock market bulls, who believe prices will continue to rise, had been celebrating the apparent disappearance of short sellers in the third quarter, which is normally a sign that stock prices are set to increase.

  • However, that's not exactly what's happened, says Ihor Dusaniwsky, managing director of Predictive Analytics at S3 Partners.
  • "There may be less shares shorted in the market, but the overall value of short exposure in the market has remained relatively stable," he said in a recent note to clients.
  • Further, Dusaniwsky tells Axios, "short selling has been increasing across the board recently."

By the numbers: Between Oct. 1 and 15, short sellers added just over $80 billion in short interest on bets against the big four U.S. stock indexes — the Dow 30, S&P 500, Nasdaq 100 and Russell 3000, S3's data show.

  • Since the start of Q2, short sellers have added nearly $368 billion of short bets on the four indexes.

Why it matters: Short sellers have a long track record of correctly predicting the direction of the market over a 12-month horizon, according to Matthew Ringgenberg, a finance professor at the University of Utah.

  • In fact, he says his short-sale index, which measures the number of shares shorted in a given period compared to the overall trend, “is arguably the strongest known predictor of aggregate stock returns” for the next 12 months, in a recent article for Barron's.

Yes, but: Short sellers' accuracy has only proven itself over a 12-month period, Ringgenberg says. His index was significantly higher in June than it is now.

What it means: Short sellers are investors who rent stock to sell it on the open market, betting that it will fall and they can purchase it at a lower price and pocket the difference.

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