Well, that was fast! With 2023 less than a month old, short sellers have already lost $81 billion.
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Many are running for the exits. From a new report from The Wall Street Journal:
Short sellers who have incurred hefty losses are actively trimming their positions, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners. Investors betting against stocks have racked up $81 billion of mark-to-market losses on short positions this month through Thursday after accumulating $300 billion in gains in 2022, Mr. Dusaniwsky said.
Markets have rallied this year, with meme stocks leading the way. As short sellers race to close their positions, their losses are likely to grow:
Signs that inflation is cooling have stoked bets among investors that the Federal Reserve will pivot from raising interest rates to cutting them as soon as the second half of the year. That has helped risky assets across the board rise. Especially risky corners of the market, such as stocks with high short interest, have rallied even more. Analysts say that has likely forced short sellers to close out bearish positions to cut their losses—resulting in what is known on Wall Street as a short squeeze.
Some of the most heavily shorted stocks have been among the best performers so far this year.
Meme stocks like AMC Entertainment Holdings, GameStop, and Bed Bath & Beyond are all up over 20%. The broader S&P 500 is up 6% for the year so far.
In addition to huge market losses, short sellers are also paying stratospheric interest rates to borrow shares. Rates to borrow AMC shares have ranged between 20% and over 100% per year in recent weeks.
It’s no wonder that some short sellers may be resorting to illegal tactics. There is evidence of widespread naked short selling in some heavily shorted stocks.
Common and preferred shares of AMC have seen millions of fails to deliver. These failed trades often occur when a short seller sells stock without borrowing it.
This is called naked short selling and it’s illegal under federal law. It’s also a powerful way to push down a stock’s price without paying any interest.
The coming months could push many short sellers to the brink.
A race to close out positions may cause heavily shorted stocks to rally further. Meanwhile, a more dovish Fed could cause a general market rally, adding to their losses.
Short sellers should avoid meme stocks like the plague. A heavily shorted stock with a passionate fan base is simply too hot to handle.
What do you think is next for short sellers? Leave a comment at the bottom and let me know!
More on markets:
Major Hedge Fund Down 54% — Survival in Doubt
Citadel’s Illegal Trades — The Tip of the Iceberg?
As Fed Rates Peak, Are Markets Ready to Take Off?
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Photo: AMC CEO Adam Aron
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