Sep 2, 2021 - Economy

Latest meme stock,, shows shorting is still riskier than ever

Illustration of a money bag surrounded by bundles of dynamite.

Illustration: Aïda Amer/Axios

The stock market's relentless upward momentum this year has lined the pockets of all kinds of investors, from veteran market players to Robinhood first-timers. It's also made shorting stocks a lot more risky than it already was.

Why it matters: The meme stock phenomenon changed the game. After an initial upheaval that wiped out GameStop and AMC shorts in spectacular fashion, shorting stocks based on fundamentals has become a move that can turn lethal on a dime.

  • More broadly, it means going up against the historic amount of liquidity that’s entered the equity market this year and the growth of a forceful “buy the dip” mentality.
  • In a nutshell, buy the dip translates to cover the short.

Driving the news: The latest heavily shorted stock to catch the attention — and the money — of Reddit's WallStreetBets traders is It nearly tripled during the back half of last week, though it's retreated from its Monday high.

  • Short interest in was about 27% as of Aug. 27, IHS Markit estimated, putting it in the top 10 most shorted equities.
Data: S&P Capital IQ; Chart: Axios Visuals

Catch up quick: Short-selling is a trade in which investors profit if a stock price declines.

  • Betting against a company sometimes gets criticism for being unpatriotic or immoral — but plenty of investors use it as a tool to hedge their positions or express views that companies are making poor decisions.

State of play: Investors with strong fundamental beliefs in a short position nowadays often don’t maintain the trade nearly as long as they would have back in the good old days of 2019, one long/short hedge fund manager tells Axios.

  • “Even if fundamentally, being net short is where you want to be, you have to be very tactical and say ‘okay fine I made some money on this short, I better take it off,’” he says.

One example: A few days into the multiday market selloff that kicked off in mid-August, “I covered a lot of stuff aggressively,” he says. “[Long investors’] urge to buy that dip was so strong that you barely had a minute to cover.”

The bottom line: The dynamics appear to have chilled shorting activity. In February, 2.94% of the outstanding shares of S&P 500 constituent companies were held by short-sellers, S&P Global Market Intelligence noted at the time.

  • As of mid-August, that percentage was 2.24%, according to an S&P analysis provided to Axios.

Go deeper: Valuations for venture-backed companies at record highs

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