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Crowded US equity shorts up 5.4% in June vs 1.8% market
average
June on pace to be 4th consecutive month of crowded short
outperformance
Shorts sellers cover crowded positions, but see opportunities
elsewhere
"Oh and uh short burn of the century coming soon. Flamethrowers
should arrive just in time," so
tweeted Elon Musk on May 4th, following the Q1 earnings call.
Well, the flamethrowers arrived last week, as did the short burn,
which has spared few of the most shorted US equities.
Since the start of June, the most shorted stocks, measured as a
percentage of float short, have dramatically outperformed the
broader market, having traded in lockstep with small capitalization
stocks throughout May. Over the last two weeks the 200 most shorted
US equities have returned an average of 5.4%, compared with 2.4%
for the Russell 2000 and 1.8% for the S&P 500.
Even when expanding to compare stocks with above median short
percentage, the stocks with higher short interest returned 2.4% vs
1.2% return for stocks below the median. But is it a short
squeeze?
Russell 2000 Performance
Shares of 200 most shorted Russell 2000 stocks, ranked by short
interest as a percentage of float, have increased in value by 6% on
average, compared with a 2% average for all index constituents. Of
those 200 highly shorted stocks, there were 28 stocks whose price
has increased more than 15% since the start of June. In that group
there was a decline in shares short of 4% on average, suggesting
that short covering is indeed putting some upward pressure on the
highly shorted stocks which are outperforming. Normalizing for the
impact of price changes, short sellers have reduced positions in
those 28 positive-momentum crowded Russell shorts by $330m in the
last two weeks. Despite the short covering, the total short
position in those stocks, in dollar terms, increased by over $1bn.
In that group Overstock.com is currently ranked as having the
greatest risk of a short squeeze, per IHS Markit's Research Signals
Short Squeeze model.
The 200 best performing stocks in the Russell 2000 had a 5%
increase in shares short on average, suggesting that short sellers
are not covering all names with positive momentum. Some of the
highly shorted stocks with increasing prices and short positions
include Dinequity, Therapeuticsmd, Impinj Inc and iRobot.
Overall, the Russell 2000 constituents have seen an increase of
16m shares short since the start of June, for an overall increase
in balances greater than $5bn. Normalizing for the impact of price
changes, the increase in shares would have added $1.5bn in new
shorts even if prices had remained the same. The covering in
crowded shorts, contrasted with an overall increase in short
positions, suggests that short sellers are doing more to allocate
short exposure away from squeeze risk rather than reducing general
exposure on the short side.
S&P 500 Performance
Short sellers have also retreated from crowded shorts in the
S&P 500. In the top 100 S&P shorts, ranked by short percent
of float, the shares short declined by 2% on average during the
first two weeks of June, compared with an increase of 3% for all
S&P stocks. The S&P names with high short interest have
also outperformed, with the share price of the 100 most shorted
constituents increasing 2.4% since the start of June versus an
average of 1.8% for all constituents. The 23 S&P names in the
top 100 most shorted, whose share price increased by at least 5%
since the start of June, had a 2% decline in shares short on
average. Taken together there appears to be less evidence of short
covering leading the large cap rally than observed for crowded
small cap shorts.
Sempra Energy, Harley Davidson and Gap have all seen greater
than 10% declines in shares short since the start of June, which
was sufficient to reduce the position in dollar terms for each.
With the share prices advancing, amid meaningful reductions in
short positions, it's fair to say they fall into the camp of stocks
where short covering likely had an impact on the recent rally.
Of the crowded S&P 500 stocks, short sellers have increased
positions in CF Industries, Discovery, Kroger and Mattel, despite
increasing share prices.
Tesla Performance
Bringing it back to the quote at the outset: TSLA, the most
shorted US equity at $12.6bn, is up more than 20% since the start
of June. In that time short sellers have returned nearly 6m shares,
though some portion of that is likely to be delta hedges coming
off, while owners of puts continue to watch the premium drain.
Wrap up
Taken together, it is fair to say that the recent "short burn"
has indeed affected the most crowded short names, which have
outperformed the broader market by a variety of metrics. Despite
the pain in certain positions, we've yet to see broad based short
covering to the extent that it actually reduces the overall size of
short positions in dollar terms.
As the 'Most shorted' chart above illustrates, the recent action
is an extension of a trend which has been in place since the start
of Q2. For the US market as a whole, the stocks with the highest
short interest as a percent of float have outperformed those with
lower short interest in March through May and are well on their way
to 4th consecutive month in June. The high short interest stocks
have also outperformed by an increasing margin each month, per IHS
Markit Research Signals. May and June are on pace for the worst
consecutive relative returns for short sellers since February and
March of 2016, when the most shorted stocks screamed out of the
drawdown and outperformed broader indices.
While the rally off the lows in 2016 may be remembered as a
short squeeze, and indeed it was for many of the Energy stocks, the
overall short position in US equities increased in terms of shares
and value from the Feb 12th lows through the end of March. While
there was some covering at the end of March of 2016, it wasn't
until April when the short covering began in earnest, with the
$33bn decline in Q2 2016 balances being, at the time, the largest
post-crisis reduction in short balances. That record was later
broken in Q4 2016 when short balances declined by $43b. Whether
history repeats itself remains to be seen, however in the last 10
years there has only been one other period of four consecutive
months where the most shorted US equities outperformed the broader
market, and zero such five month runs.