Short Selling Against S&P 500 Rises to Highest Since November

Short Selling Against S&P 500 Rises
Traders work in the S&P 500 pit at the CME Group's Chicago Board of Trade in Chicago. Photographer: Tim Boyle/Bloomberg

Bearish bets against the Standard & Poor’s 500 Index rose to a nine-month high as short sellers increased speculation stocks may decline amid concerns over the strength of global economic growth.

The proportion of S&P 500 shares outstanding sold short on Aug. 29 rose to 3.03 percent, the most since the end of November and up from 2.37 percent at the beginning of August, according to New York-based Data Explorers, which provides research on short sales and stock lending. Short selling of the gauge reached a three-year high of 5.52 percent in August 2008, before the worst financial crisis since the 1930s drove the stock index to a 12-year low in March 2009.

Short selling increased in August after S&P downgraded the U.S. government’s credit rating and yields on Greek debt surged to record highs, spurring concern the debt crisis in Europe isn’t contained. Investors made bearish wagers on equities and shifted holdings to havens such as Treasuries, which posted the highest returns since December 2008.

“We’ve had inadequate policy responses to the problem of too much debt, and that makes people concerned,” Mark Travis, chief executive officer of Jacksonville Beach, Florida-based Intrepid Capital Management Inc., said in a telephone interview. “Investors and advisers are doing more now on the short side to protect their capital and they’re trying to find alternatives to flat market returns,” said Travis, who manages $1.3 billion and uses short selling as an investment strategy.

S&P 500’s Performance

The S&P 500 lost as much as 13 percent last month before trimming its retreat to 5.7 percent after the Federal Reserve will take action to spur growth. The ratio of bullish to bearish investments in U.S. equities has dropped to 10.7 from this year’s peak of 13.2 in May, according to Data Explorers. The measure sank to 6.5 in September 2008 after Lehman Brothers Holdings Inc.’s bankruptcy spurred the worst financial crisis since the 1930s. A lower number indicates investors are getting relatively more short on equities.

Bearish bets by investors using futures contracts on the S&P 500 Index increased to the highest level in almost four years in the week ended Aug. 23, according to data compiled by Bloomberg and the Commodity Futures Trading Commission. Short selling involves the sale of securities borrowed from the owner, and generates profit when the trader repurchases them at a lower price and returns them to the owner.

Hedge funds and other large speculators hold a net 84,492 futures contracts wagering that the S&P 500 will decrease in value. The short position is the highest since September 2007 when bearish bets reached a record of 127,473 contracts in September 2007, a month before the benchmark equity reached an all-time high, according to Bloomberg data going back to 1997.

Market Proxy

“A lot of people are using the S&P 500 as a proxy for the market to hedge their long positions,” Bill Fleckenstein, president of Fleckenstein Capital Inc. in Seattle, said in a telephone interview. “If you’re short the market, then you’ve reduced your risk and you’re not dependent on finding the variables that are going to take this stock or that stock down, which is harder.”

GameStop Corp., the world’s largest video-game retailer, and SuperValu Inc. are the most shorted in the S&P 500, according to Data Explorers. Bearish bets against GameStop amount to 32 percent of shares outstanding, while the owner of Save-A-Lot and Cub Foods grocery stores has a short interest of 27 percent.

“It’s very difficult to say with certainty whether being long or short right now is a good idea because things can quickly change,” Eden Chen, portfolio manager at Los Angeles-based Lightmark Capital, wrote in an e-mail. “Because of this dynamic, in the short term, traders have to take on a reactive policy and hedge their positions using shorts until we see some form of stabilization or confidence in the market.”

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