The domestic Biotech Sector has been rallying of late, in response to continued enthusiasm that the progress towards a Covid-19 antiviral or vaccine is promising. The IBB ETF, iShares Nasdaq Biotech ETF, is up over +6.5% for the year and over +17% over the last month. As expected, we’ve seen correlated short covering in the sector during this rally. Total short interest in the sector is $49.26 billion, and we’ve seen $612 million of short covering over the last month. But surprisingly, the covering was concentrated from April 10th through May 1st and we’ve seen an increase of bearishness over the last week with $190 million of new net short selling.
The average Short Interest % of Float for the entire domestic equity market is 7.44% while the average Short Interest % of Float for the Biotech Sector is 11.10%, signifying a larger portion of tradable stocks in the sector are being shorted – the Biotech Sector is a much more popular short than the rest of the domestic equity market.
Biotech stocks with largest Short Interest % Float (minimum $50MM of short interest):
The average Stock Borrow Fee for the entire domestic equity market is 0.76% fee while the average Stock Borrow Fee for the Biotech Sector is 0.95%, signifying there more of the lendable shares are being used to support short selling and the natural supply\demand dynamic has forced stock borrow rates higher – the Biotech Sector is a more prone to short squeezes than the rest of the domestic equity market.
Biotech stocks with largest Stock Borrow Fees (minimum $50MM of short interest):
The average Daily Borrow Cost for the entire domestic equity market is $14.57 million while the Daily Borrow Cost for the Biotech Sector is $1.30 million, while Biotech shorts make up only 7% of the overall short interest in the domestic equity market, they are paying 9% of the overall daily stock borrow costs – shorts in the Biotech Sector are paying away much more of their Alpha in order to stay in their trades. This tells us that expected Alpha is much higher in the Biotech Sector than the general domestic equity market.
Biotech stocks with largest Daily Stock Borrow Cost (minimum $50MM of short interest):
For most of 2020 shorting the Biotech Sector was a profitable trade, but with its recent month long rally sector wide short side profits have taken a hit. Up until one month ago shorts in the sector were up +$7.2 billion in net-of-financing mark-to-market profits, but are now up only +$13 million, +0.03%.
Most Profitable Biotech stocks – YTD MTM P\L % (minimum $25MM of short interest):
Least Profitable Biotech stocks – YTD MTM P\L % (minimum $25MM of short interest):
The Biotech Sector rallied strongly over the last month, eating up virtually all the mark-to-market profits earned earlier in the year. Monthly net-of-financing mark-to-market losses in the sector totaled -$7.20 billion, -15.45%. Shorts in stocks with large percentage losses are prime short squeeze candidates. We will probably see short covering in stocks with over -50% returns over the last month as short sellers trim their exposure in order to cut their losses.
Most Profitable Biotech stocks – Month MTM P\L % (minimum $25MM of short interest):
Least Profitable Biotech stocks – Month MTM P\L % (minimum $25MM of short interest):
The Biotech Sector rally was stronger over the last week than earlier in the year. Weekly net-of-financing mark-to-market losses in the sector totaled -$3.02 billion, -6.36%. Shorts in stocks with large percentage losses are prime short squeeze candidates. There were very few stocks with positive returns, with only 19% of the shorted biotech stocks being profitable trades.
Most Profitable Biotech stocks – Week MTM P\L % (minimum $25MM of short interest):
Least Profitable Biotech stocks – Week MTM P\L % (minimum $25MM of short interest):
Looking at bearishness conviction on the short side can provide insight into market trends of the stocks that are being shorted. By breaking up last month’s short selling and covering activity between trading activity during first three weeks of the time period versus the last week we can see if the outlook, or Alpha potential, has changed.
Short side bearishness in the following stocks has not waned, shorts were active for three weeks and continued to sell short last week. Short selling in Moderna (MRNA) has accelerated lately with $78 million of new short selling last week.
Overall, there were not many shorted stocks that saw a significant flip of bearish convictions. But of the stocks that saw short bears running out of steam and now covering their positions, Iovance Biotherapeutics (IOVA) and Biogen (BIIB) led the pack.
Looking at stocks whose short conviction was declining throughout the four week period we see that Abbvie (ABBV) saw the biggest capitulation on the short side. Short sellers covered nearly a $ billion over the first three weeks we are looking at, followed up by nearly $300 million worth of short covering last week. Accelerated short covering was seen in Exact Sciences (EXAS), Portola Pharmaceuticals (PTLA), Biogene (BGNE) and Bluebird Bio (BLUE).
Shorts who were covering their short exposure for three weeks but have reversed course over the last week and are now shorting again are led by Gilead Sciences short sellers. Shorts had covered $58 million of their exposure for three weeks, but they are now shorting with gusto and added $127 million of new shorts over the last week.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index or country-wide basis allowing investors\traders to better manage their existing long and short positions as well as generate new trade ideas.
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Managing Director Predictive Analytics, S3 Partners, LLC
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