Short Sales Are at Their Highest Level Since the Financial Crisis

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U.S. equity bears, mired in the longest streak of losses in 25 years, are getting bolder.

Unfazed by three years of money-losing bets against stocks, short sellers increased their bearish wagers in June to the highest level since the financial crisis, according to data compiled by the New York Stock Exchange. For now the move has proved well-timed as a Goldman Sachs Group Inc. index of most-shorted stocks slumped 10 percent over 10 days through Wednesday, one of the worst declines since 2009.

Source: Bloomberg

It’s a rare victory for short sellers, who borrow stock with the aim of replacing it once the price falls. They’re reloading as the Greek crisis threatens the euro zone and Chinese shares collapse just as the Federal Reserve prepares to raise interest rates.

“The danger in shorting a stock, or the market in general, is that it will continue to move up longer than one can stay financially viable,” said Stacey Nutt, chief investment officer who oversees about $5 billion at ClariVest Asset Management LLC in San Diego, California. Turmoil in China and Greece has “increased confidence by shorts that the market, even in the U.S., will have difficulty moving up in the face of such significant macro headwinds,” he said.

Losing Strategy

Betting against stocks has been a losing strategy since 2009 as the Standard & Poor’s 500 Index rallied more than 200 percent and all but 22 members climbed. The HFRI Short Bias Index of equity hedge funds has fallen in five of the past six years, a performance not seen in 2 1/2 decades of data.

U.S. equities rose amid a global rebound today, sending the S&P 500 up 0.2 percent at 4 p.m. in New York.

With stocks in China plunging more than 30 percent over four weeks and aid talks between Greece and its creditors breaking down, bears are perking up. The number of shorted shares increased 3.3 percent from a month ago to 16.2 billion in June, the most since September 2008, according to NYSE data.

“What’s conspiring here is obviously the lingering worries about Greece coupled with the fact that Chinese equities continue to decline into bear market territory,” said Mark Luschini, chief investment strategist in Philadelphia at Janney Capital Management LLC, which oversees about $68 billion. “Obviously we’re sort of captive to what is taking place way from us, which is highly unpredictable.”

Slowing Momentum

Turbulence from China to Greece is adding anxiety to American stocks, where momentum is slowing. The S&P 500 lost 0.2 percent from April to June, ending nine straight quarters of gains, the longest streak since 1998.

As investors retreat from risky assets, stocks with the highest short interest suffered from some of the worst declines. The Goldman basket, made up of the 50 most-shorted companies on the Russell 3000 Index, slipped in all but two of the last 10 sessions. The 10 percent decline over the stretch matched the drop in October, which was the biggest since 2011.

“Those companies are the worst of the bunch in terms of how they’re fundamentally doing,” said Jimmy Lee, chief executive officer at Las Vegas-based Wealth Consulting Group, which oversees about $500 million. “Investors are worried,” he said. “A lot of this may be just from people that are not taking advantage of markets going down, but hedging their long portfolios.”

World Acceptance Corp., a provider of consumer loans, ranked the most hated stock in the Russell 3000 with 72 percent of its shares sold short, exchange data compiled by Bloomberg show. The stock has dropped 26 percent in the past month as FBR Capital Markets downgraded its rating.

Fund Positions

Sears Holdings Corp., the retailer that has posted 12 straight quarters of losses, is down 42 percent from its 2015 peak. Its short interest reached 50 percent.

Rising short sales sent a gauge of hedge fund manager bullishness compiled by Evercore ISI down 1.3 percentage points over the past month, putting the measure of short and long exposure close to neutral. In futures tracking the S&P 500, bearish positions outnumber bullish ones by the most in three years.

“Markets feel unsettled, a lot of momentum names rolling over,” said Brian Barish, who helps oversee about $12.5 billion at Denver-based Cambiar Investors LLC. “Personally I think we just churn around for awhile, but others may see something darker.”

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