Short sellers rack up US$25 billion loss on riskiest US stocks

IT HAS been a brutal month for traders shorting the riskiest US stocks, and as animal spirits imbue retail investors with boundless confidence, strategists expect the misery to continue for bears.

As of Thursday (Jul 24), investors had lost US$2.5 billion in the month, betting against the 50 US-listed stocks with the highest short interest, according to data from S3 Partners. Doubting the hype in those firms, which include meme-stock darling Kohl’s Corp, produced four times greater losses than the average short in the US market, as individual traders have pushed into speculative names.

This week poses a big test for the risk-on mood, with the Aug 1 deadline for US trade deals looming, one of a slew of key events. However, strategists say the meme-stock frenzy likely has room to run. Data from Vanda Research Corp shows that net retail buying of companies such as Opendoor Technologies Inc and Krispy Kreme Inc has continued to trend higher. Trading frequency has risen as well, said Marco Iachini, senior vice-president of research at Vanda Research.

“I’m not seeing any signs” that the craze is fading, he said.

Driving home how profitable a stretch it has been for investors betting on speculative corners of the market, a Goldman Sachs Group Inc basket of 50 stocks with the highest short interest in the Russell 3000 Index just posted a record ninth straight week of gains. It has climbed 33 per cent in that time, and clobbered both the Russell 3000 and the S&P 500 Index’s returns of 10 per cent each. That Goldman basket of stocks is up 15 per cent this month.

Justin Walters, co-founder at Bespoke Investment Group, wrote in a Thursday note: “July has been a banner month for investors long on the most heavily shorted stocks (and brutal for those short them).”

Michael O’Rourke, chief market strategist at Jonestrading Institutional Services, said the run of outperformance by the most-shorted stocks in the market could signal that the current risk-on sentiment in the market is short-lived.

“I actually don’t think this will be anywhere near as long as in 2021,” he said. The breadth of this meme-stock rally stands in sharp contrast to the case in 2021, when traders mainly piled into GameStop Corp and AMC Entertainment Holdings, he said.

Other potential hurdles for equities bulls are on the calendar this week: A Federal Reserve monetary-policy decision, earnings results from a quartet of “Magnificent Seven” companies and Friday’s monthly jobs report. Plus, trading desks at firms, including Goldman, last week urged clients to buy cheap hedges against potential losses.

SEE ALSO

Short selling is simply part of normal market functioning

Meme-stock roar fades on Wall Street as retail finds new thrills

However, amateur traders may drag institutional money into the speculative rally and keep it going, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.

Once there are “hedge fund holdings on both the long and short sides of these names, coupled with retail buying pressure, they tend to be more volatile and produce higher returns”, he said. That produces more pain for short sellers, he added.

Retail investors are “squeezing hedge funds and then forcing this upward move”, Vanda’s Iachini said. BLOOMBERG