Looking at Short Interest as a % of Float, we do see a significant decrease in shares shorted, but just counting the total amount of physical shares shorted does not give a complete picture of short selling and short exposure. We need to look at Short Interest, or dollars at risk, to truly see what the shorts are doing.
Total shares shorted, as represented by S3 SI% Float and the original SI % Float show a -4% and -7% decrease, respectively, in shares shorted in the 4th quarter. S3 SI % Float differs by SI Float by taking into account the “synthetic longs”, which are tradable securities created by short selling, in additional to the traditional float calculation which increases overall tradable liquidity in a security.
While the decrease in shares shorted has increased stock lending supply in many securities there has been a tilt towards increased short selling in harder to borrow stocks with higher stock loan fees. Over the 4th quarter average stock lending fees increased by 20%, from 0.86% fee to 1.03% fee. The biggest increase in stock borrow fees occurred in the Miscellaneous (which includes SPACs) and Consumer Discretionary sectors with stocks such as Switchback Energy (SBE US), Gores Holdings (GHIV US), Pershing Square Tontine Holdings (PSTH US), QuantumScape (QS US), Tui AG (TUI1 GR), Haier Smart Home (6690 HK), Fisker (FSR US), HelloFresh (HLFFF US) and DoorDash (DASH US) having the largest effect on the weighted average rate increase.
Overall, worldwide short interest increased by 15.60% in the fourth quarter with the largest increases in the Energy, Consumer Discretionary and Communication Services sectors. On the other side of the coin there were no sectors that had a decline in fourth quarter short interest, but the Utilities Sector had the smallest increase with just a 0.98% increase in total short interest.
While overall worldwide short interest increased in the fourth quarter most of the increase was due to mark-to-market increases in the value of the securities shorted. In actuality, short sellers were buying to cover into the fourth quarter rally as short sellers were squeezed out of some positions due to large mark-to-market losses or needed to trim positions to stay under portfolio risk limits. Traders were delta hedging their short exposure, selling shares as stock prices rose in order to keep their dollar exposure within acceptable risk levels. The $234.7 billion increase in worldwide short interest was composed of $285.4 billion of mark-to-market appreciation and -$50.7 of short covering.
As was seen I the third quarter of 2020, by using the incorrect metric or ignoring relevant ones we can see where the narrative of short sellers exiting the market was an easy and popular story line. But, as the markets rose, short sellers were forced to sell shares in order to keep their short exposure at levels they were comfortable with. There may be fewer shares shorted in the market, but the overall value of short exposure in the market has increased.
As worldwide markets continue to climb, we will probably see much of the same short activity in 2021. The trend of short covering should continue as mark-to-market losses continue to mount, but overall short interest will increase as the value of shorted shares rise. Short sellers were down -$298 billion in mark-to-market losses in the fourth quarter which squeezed many short sellers out of their positions. The largest overall losses occurred in the Consumer Discretionary and Information Technology Sectors with no sector showing net profitable short selling. On average, short sellers were down -17.11% in the fourth quarter.
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Research Note written by Ihor Dusaniwsky, Managing Director of Predictive Analytics, S3 Partners, LLC
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