U.S.\Canada Short Side Sector Rotation

Author:

Ihor Dusaniwsky

Managing Director of Predictive Analytics, S3 Partners

Matthew Unterman

Director of Predictive Analytics, S3 Partners

January 5, 2024

Short Sellers have been active in 2023 even though the S&P 500 and Russell 3000 indexes were up +24% and Nasdaq index was up +43%. Total short interest increased by $221 billion, to $1.08 trillion in 2023. The sectors with the largest increase in short interest were Information Technology (+$75 billion) and Consumer Discretionary (+$46 billion). Only the Miscellaneous (SPAC) sector saw a decrease in short interest (-$0.2 billion).

Short Interest in $ millions

12/30/2022 Short Interest

12/29/2023 Short Interest

2023 Change Short Interest

Communication Services

$57,036

$72,364

$15,328

Consumer Discretionary

$128,135

$174,449

$46,314

Consumer Staples

$43,116

$48,600

$5,485

Energy

$69,431

$78,069

$8,638

Financials

$117,346

$137,618

$20,273

Health Care

$115,220

$130,564

$15,345

Industrials

$96,449

$119,992

$23,543

Information Technology

$141,110

$216,346

$75,235

Materials

$35,131

$37,684

$2,554

Misc. (SPACs)

$265

$56

($209)

Real Estate

$33,735

$40,083

$6,348

Utilities

$22,718

$24,699

$1,981

Grand Total

$859,692

$1,080,526

$220,834

Change in short interest has two components, the change in the number of shorted shares and the change in the stock’s price. The $220.8 billion change in total short interest was made up of a $57.2 billion increase in the total amount of shares shorted coupled with a $163.6 billion increase in the stock price of the shares shorted. Short sellers were increasing their short exposure to the market even though stock prices were rising, and they were incurring mark-to-market losses.

In 2023, short interest increased in virtually all of the sectors, but we saw investors ramp up their exposure in the Information Technology (+$75.2 billion) and Consumer Discretionary (+$46.3 billion) sectors the most. But most of the increase in short exposure in these two sectors was not due to increased short selling but rather a mark-to-market increase in the shares they had already shorted. Short sellers were not reducing their exposure in these shorted stocks that were producing negative returns, they were not trimming their overall positions even though there was short squeeze pressure in many of their stocks. Depending on the stock, their conviction was high that the shares were over-bought and priced too high, or the stock was a significant part of a portfolio hedging or risk mitigation strategy.

Short Interest in $ millions

12/29/2023 Short Interest

2023 Change Short Interest

2023 Change Shares Shorted

2023 Change Mark-To-Market

Communication Services

$72,364

$15,328

$2,336

$12,992

Consumer Discretionary

$174,449

$46,314

$3,900

$42,414

Consumer Staples

$48,600

$5,485

$6,506

($1,022)

Energy

$78,069

$8,638

$8,403

$236

Financials

$137,618

$20,273

($249)

$20,522

Health Care

$130,564

$15,345

$20,877

($5,532)

Industrials

$119,992

$23,543

$6,852

$16,691

Information Technology

$216,346

$75,235

$832

$74,403

Materials

$37,684

$2,554

$114

$2,439

Misc. (SPACs)

$56

($209)

($79)

($130)

Real Estate

$40,083

$6,348

$3,874

$2,473

Utilities

$24,699

$1,981

$3,841

($1,860)

Grand Total

$1,080,526

$220,834

$57,207

$163,627

Ten out of the top twenty stocks that had the largest increases in short interest were in the Consumer Discretionary or Information Technology sectors:

Ticker

12/29/2023 Short Interest

2023 Change Short Interest

2023 Change Shares Shorted

2023 Change Mark-To-Market

TSLA US

$20,338

$10,460

$413

$10,047

MSFT US

$19,619

$10,460

$5,258

$5,202

NVDA US

$12,687

$7,089

($6,281)

$13,370

AAPL US

$22,700

$6,585

($1,179)

$7,764

META US

$9,939

$6,414

($429)

$6,843

AMZN US

$12,064

$5,610

$390

$5,220

AMD US

$7,701

$5,606

$2,933

$2,673

RTX US

$5,529

$4,599

$4,754

($155)

XOM US

$7,660

$4,050

$4,388

($338)

UBER US

$4,446

$3,516

$2,131

$1,386

GM US

$3,829

$3,111

$3,063

$49

BX US

$4,293

$2,948

$1,920

$1,028

GOOGL US

$6,705

$2,902

$684

$2,218

GOOG US

$5,660

$2,837

$1,176

$1,661

PDD US

$4,745

$2,809

$1,273

$1,537

AVGO US

$5,710

$2,645

($409)

$3,054

AMAT US

$3,531

$2,409

$1,665

$745

NFLX US

$4,823

$2,091

$311

$1,779

COIN US

$3,564

$2,084

($3,711)

$5,795

CNQ US

$4,604

$2,080

$1,626

$454

Stocks with the largest decrease in short interest in 2023 were more mixed but six of the top twenty stocks with the largest decrease in short interest were in the Financial sector:

Ticker

12/29/2023 Short Int

2023 Change Short Int

2023 Ch Shares Shorted

2023 Ch MTM

BABA US

$3,009

($1,919)

($1,327)

($592)

VOYA US

$205

($1,115)

($1,361)

$246

RY US

$592

($978)

($1,097)

$119

SIVBQ US

$0

($910)

($0)

($910)

DD US

$508

($904)

($1,075)

$171

MMM US

$751

($881)

($737)

($144)

HD US

$3,318

($858)

($1,264)

$406

SU US

$695

($808)

($823)

$15

ENB US

$1,188

($796)

($639)

($156)

VICI US

$321

($785)

($767)

($18)

TXN US

$2,613

($771)

($878)

$107

BNS US

$1,056

($759)

($748)

($11)

TD US

$871

($720)

($716)

($3)

ODFL US

$806

($655)

($1,282)

$626

BMRN US

$446

($626)

($553)

($73)

SE US

$774

($616)

($308)

($308)

FHN US

$137

($589)

($283)

($307)

MCK US

$894

($555)

($895)

$339

BILL US

$427

($554)

($308)

($247)

HUM US

$697

($549)

($417)

($132)

While increases and decreases in short interest tell us where investors are increasing or decreasing their short exposure, changes in shares shorted shows us investor activity that actually hits the trading tape and moves stock prices.

We saw $57.2 billion of increased short selling in 2023 with the largest increase of short selling occurring in the Health Care (+$20.9 billion) and Energy (+$8.4 billion) sectors while we saw slight short covering in the Financials (-$0.2 billion) and Miscellaneous-SPAC (-$0.08 billion) sectors.

Once again Information Technology and Consumer Discretionary stocks dominated the league tables with nine of the top twenty most shorted stocks in 2023:

Ticker

12/29/2023 Short Int

2023 Change Short Int

2023 Ch Shares Shorted

2023 Ch MTM

MSFT US

$19,619

$10,460

$5,258

$5,202

RTX US

$5,529

$4,599

$4,754

($155)

XOM US

$7,660

$4,050

$4,388

($338)

GM US

$3,829

$3,111

$3,063

$49

AMD US

$7,701

$5,606

$2,933

$2,673

CVX US

$4,963

$2,066

$2,555

($490)

UBER US

$4,446

$3,516

$2,131

$1,386

BX US

$4,293

$2,948

$1,920

$1,028

TSCO US

$2,712

$1,793

$1,834

($41)

AMAT US

$3,531

$2,409

$1,665

$745

CNQ US

$4,604

$2,080

$1,626

$454

INTU US

$2,960

$2,066

$1,524

$542

RIVN US

$2,456

$1,594

$1,359

$235

TMUS US

$4,172

$1,711

$1,354

$357

PDD US

$4,745

$2,809

$1,273

$1,537

ARM US

$1,234

$1,234

$1,234

$0

ALB US

$1,725

$987

$1,233

($246)

GEHC US

$1,183

$1,183

$1,183

$0

GOOG US

$5,660

$2,837

$1,176

$1,661

PEP US

$2,743

$984

$1,090

($105)

And Information Technology and Consumer Discretionary stocks also led in the most bought-to-cover stocks in 2023, holding eleven of the top twenty spots:

Ticker

12/29/2023 Short Int

2023 Change Short Int

2023 Ch Shares Shorted

2023 Ch MTM

NVDA US

$12,687

$7,089

($6,281)

$13,370

COIN US

$3,564

$2,084

($3,711)

$5,795

VOYA US

$205

($1,115)

($1,361)

$246

BABA US

$3,009

($1,919)

($1,327)

($592)

TSM US

$1,945

($394)

($1,321)

$927

ODFL US

$806

($655)

($1,282)

$626

HD US

$3,318

($858)

($1,264)

$406

PANW US

$4,731

$1,909

($1,233)

$3,142

AAPL US

$22,700

$6,585

($1,179)

$7,764

TEAM US

$824

($239)

($1,141)

$902

DHI US

$1,010

($249)

($1,136)

$888

RY US

$592

($978)

($1,097)

$119

DD US

$508

($904)

($1,075)

$171

MPWR US

$916

($163)

($1,008)

$845

CVNA US

$1,879

$1,623

($985)

$2,608

MCK US

$894

($555)

($895)

$339

FERG US

$373

($458)

($890)

$433

TXN US

$2,613

($771)

($878)

$107

BLK US

$1,667

($523)

($842)

$319

SU US

$695

($808)

($823)

$15

There are two main reasons for the increase in short interest in 2023. The 2023 rally produced over-bought and over-priced stocks in which short sellers are looking for a pull back and with many hedge funds under-exposed to the market in the earlier part of the year they began leveraging up both their long and short books in order to gain more market exposure and boost full-year returns.

But we also see that there still remains a herd mentality in the short side of the market. 78% of the dollars shorted saw an increase in short interest, but this was only in 37% of the stocks that have been shorted. And while 62% of all dollars shorted saw an increase in short selling, the short selling occurred in only 39% of the shorted stocks.

Active short selling is occurring in just over a third of the shorted stocks in the market, which means that price movement and volatility due to short selling and short covering is concentrated in a smaller group of securities. Knowing which sectors and which stocks have this concentration can provide insight into portfolio construction and risk management. Which in turn, can help produce outsized returns if the short side volatility is identified and traded appropriately.

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. The Black MaP and Black App products provide a total view of long and short positioning in the market with a breakdown between Active\Passive long investors, 24 Fund type entities, over 50k securities globally across 108 countries and data from 58 regulatory exchanges.

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