A major rally this year has punished short sellers, leading to massive losses.
From a report out overnight in The Wall Street Journal:
Short sellers have incurred roughly $120 billion in mark-to-market losses this year, including $72 billion in the first half of June, according to S3.
“There are still many investors and hedge funds who think that this rally is ready for a pullback,” said Ihor Dusaniwsky, managing director of predictive analytics at S3. “Or at least that several of the highflying stocks will lose steam and revert back to the mean.”
The AI-driven rally in big tech stocks is responsible for most of these losses. Jumps in heavily shorted meme stocks have meant even greater pain for the hedge funds and institutions betting against markets.
Increasing interest rates also mean that holding short positions is more costly.
To short a stock, a trader must borrow the shares and sell them.
The trader pays an interest rate for borrowing the shares. Those short interest rates rise along with the federal funds rate.
I hate short selling as a strategy.
Best case scenario, you make 100% on your money. Worst case, your potential for loss is unlimited.
Moreover, you’re swimming against the general rising tide of markets. And that short position is costing you in interest.
Every day, humans are innovating. Together, they form companies and create incredible new products.
And here in the United States, they do it in the world’s best legal and cultural environment for business. Betting against them is foolish.
If we zoom in on the market and look at some of the most successful companies, the picture becomes even clearer.
Let’s take Nvidia. Nvidia began as a small supplier to videogame console makers, going public in 1999.
Since then, its stock is up more than 900-fold. A return like that always beats a short sale.
Prophets of doom will always be with us. But I’m betting my money on a bright future.
What do you think 2023 holds for markets? Leave a comment and let us know!
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