Fear and uncertainty; these two words possibly best describe 2020 so far. As countries around the world have taken unprecedented action to tackle the pandemic, major economies have ground to a halt, stock markets have nose-dived, and investor sentiment has been significantly dented.
It’s within this kind of environment that short sellers usually thrive. With the ability to take advantage of falling market conditions, terms like fear and uncertainty are usually buy signals – or in this case, shorting signals – for traders.
However, our data suggests that what should have so far been a stellar year for the short selling community has, in fact, been a much more challenging environment:
- In July we drew attention to how several hedge funds had built significant short positions in UK supermarkets, only to exit the trades with little to no profit
- We followed this with an analysis of how hedge funds lost €800m on travel and tourism bets during the peak summer season
- In September, our monthly analysis of FTSE 100 short positions showed that short sellers made a £418m profit in September, but this was cancelled out by £420m of losses the previous month
- And last week we highlighted how short sellers had lost $16bn on bets against the 30 biggest US companies since April
So what is going on?
Government intervention may be a major factor at play here. The sheer scale of the crisis has required an exceptional package of support from governments around the world to stabilise economies, keep businesses afloat and prevent mass unemployment.
This necessary action has played a huge role in alleviating the volatility we saw in February and March and therefore may have had a distorting effect on the short positions that were seeking to capitalise on the anticipated fear and uncertainty across markets. A cursory glance at VIX, often described as the “fear index”, shows that since March, levels of “fear” – although heightened – have remained consistent.
Volatile markets are where short sellers can be most successful and, without these conditions, it’s easy to see why many have struggled so far this year.
But that is unlikely to be the end of the story. With the US election just weeks away, a hard Brexit becoming an increasingly likely scenario and countries around the world struggling to cope with a second wave of Covid-19, the volatility that we’ve all been anticipating may be yet to come. The short selling community will certainly be hoping it does – and with that may come a change in fortunes. 2020 may still turn out to be a stellar year, for short sellers at least.
The Short Interest Ratio, Days to Cover, is now the highest it’s been for a year. Reaching a market-cap weighted average DTC of 6.36. That means the average US company (as weighted by market cap) has over 6 days worth of the volume of it’s shares out on loan and most likely shorted.
You can get an up to date chart here – US Short Interest
by Peter Hillerberg, co-founder of Ortex Analytics