Note: This is not financial advice.
Short sellers are having their worst month since January 2021. From a new Bloomberg report:
Somehow, the stock market’s worst first half in five decades has morphed into a slaughterhouse for short sellers.
More big lumps were felt Tuesday, when the S&P 500 rallied 2.8% and bearish traders suffered losses roughly double that.
About 98% of S&P 500 members advanced, the broadest rally since December 2018. The most-hated stocks jumped 5.5%, eventually delivering pain for bears who were forced to cover their positions to limit losses, going by a Goldman Sachs Group Inc. basket. With the most-shorted basket up 16% in July, the month is shaping up to be the worst for short sellers since the retail-driven squeeze in January 2021.
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Heavily shorted stocks have not run like this since meme stocks skyrocketed last January. Indeed, meme stocks are causing some of the biggest pain for shorts right now.
This tussle between the two sides of the investment world has continued this year, and fresh data from S3 Partners, LLC shows that between January and July 2022, AMC short sellers lost more than $1 billion in mark to market losses.
We’re in a bear market. This is not a great time to bet that stocks will go lower.
But hedge funds have piled in anyhow, betting against volatile stocks with cult followings. And again, they’ve taken major losses.
Perhaps some in the hedge fund world are beginning to learn their lesson. I had dinner with a bunch of hedge fund guys last month, and one said:
“Short selling is a great way to lose money.”
Now, short selling hedge funds may be forced to buy stock. They cannot fall too far behind their benchmarks.
Again from Bloomberg:
“Positioning had gotten very defensive as managers were anticipating additional downside. However, if the market rallies, then they are at risk of underperforming the broader market,” Freeman said. “Shorts are hurting their performance and they don’t have enough long exposure to keep up so they are forced to buy.”
Short sellers being forced to buy stocks to stem losses…this is the definition of a short squeeze.
I certainly don’t know if or when any stock will squeeze. But I do know I wouldn’t want to be on the other side of these trades.
What do you think is next for short sellers? Leave a comment at the bottom and let me know!
More on markets:
AMC Fails to Deliver Hit 9.7 Million
Wall Street Banks Turn on Each Other as Federal Probe Looms
New Law Could Put Big Short Sellers on the Endangered Species List
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