Overall short exposure in the domestic market grew by $108 billion in 2020 to $1.05 trillion in equity\ADR short interest. This rise in short interest masked the fact that short sellers were actively covering their positions into the 2020 rally. The $282 billion of mark-to-market increase in the value of shares shorted was partially offset by $175 billion in buy-to-covers. Short-side mark-to-market losses caused short squeezes in many shorted domestic equities/ADRs.
Short sellers were down -$245 billion in aggregate net-of-financing mark-to-market losses in 2020, a -26% return on 2020 average short interest. The largest losses were in the Consumer Discretionary and Information Technology Sectors while there were minimal profits in the Energy, Real Estate, Financial and Utilities Sectors.
Short selling equities\ADRs in 2020 was, on average, a losing proposition with 57% of all stocks shorted ending up in the red. Performance in the larger short holdings were especially unprofitable with 69% of every dollar shorted being a losing proposition in 2020.
There were only five short positions with over $1 billion in year-to-date mark-to-market profits Energy, Airline, Banking, and special situation stocks such as Luckin Coffee, Wirecard and Nikola topped the list of short side winners. The twenty-five most profitable shorts in 2020 were:
While there were only five short winners with profits over $1 billion, there were fifty-two stocks with over $1 billion of short losses. Tesla was by the far and away the most unprofitable trade in 2020 and had the largest yearly loss we have seen historically. Most of the highly unprofitable 2020 shorted stocks were tech and\or Covid stay-at-home plays. The twenty-five least profitable shorts in 2020 were:
Looking at the first three weeks of 2021 we are seeing much the same short activity we had seen in 2020. Total domestic short interest has increased by $51 billion as the markets have rallied and pushed share prices higher. As their stock prices have risen, short sellers have trimmed their positions due to short squeezes and risk limit adjustments. We have seen $26 million of short covering so far in 2021 in the face of -$78 billion in net-of-financing mark-to-market losses. History may not repeat itself exactly, but so far in 2021 the storyline seems awfully familiar.
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Research Note written by Ihor Dusaniwsky, Managing Director of Predictive Analytics, S3 Partners, LLC
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