Short interest in the domestic market increased by +$82.1 billion, or +7.31%, to $1.21 trillion in the second quarter of 2021. With the overall market rallying, the majority of this increase, +$68.4 billion, came from mark-to-market appreciation of the shorted securities, but there was also +$13.6 billion of additional short selling in the quarter.
The sectors with the largest increase in short exposure were Information Technology (+$25 billion), Health Care (+$12 billion), Consumer Discretionary (+$11 billion) and Financials (+$11 billion). The only sector that had a reduction in short exposure over the 2nd quarter was the Utilities sector which was down slightly (-$283 million).
Short exposure continues to be concentrated in several sectors: Information Technology ($260 billion), Consumer Discretionary ($216 billion) and Health Care ($171 billion).
Short Interest as a % of Float did not change appreciable in the 2nd quarter, decreasing just -13 bps from 5.39% to 5.26%. But there were several sectors with some movement. The Industrial sector had a 0.29% increase in SI % Float to 4.36% and on the downside Communication Services fell -0.70% to 4.85%. The Miscellaneous (primarily SPACs) sector has the largest SI % Float at 9.59% and Consumer Discretionary (6.52%) and Health Care (6.30%) were the only two other sectors over 6%.
The S3 SI % Float, which includes the synthetic long shares created by every short sale in the denominator, fell 9 bps over the quarter, from 4.86% to 4.77%.
It became more expensive, on average to short stocks in the 2nd quarter as the average stock loan fee rose 10 bps from 0.58% fee to 0.68% fee. Due to the proliferation of SPAC short selling stock loan rates in the Miscellaneous sector increased 253 bps from 4.09% to 6.62% fee, mainly because of the limited stock loan availability in most SPAC securities.
Overall short sellers paid $2.07 billion in stock borrow fees in the 2nd quarter of 2021 (calculated daily borrow cost using S3’s offer rate) versus $2.01 billion in stock borrow expenses in the 1st quarter of 2021. Nine stocks made up a fifth of the total domestic equity stock borrowing costs for the quarter: SOFI -$82mm, UPST -$81mm, BLNK -$45mm, ARVL -$40mm, CCIV -$39mm, LAZR -$36mm, AMC -$31mm, PATH -$29 and SKLZ -$26mm.
High stock borrow fees can test the conviction level of short sellers as financing costs can take a large bite out of expected Alpha. The highest stock borrow fees, as of June 30th, for stocks with over $100 million of short interest were:
Short sellers were down -$93.4 million in 2nd quarter mark-to-market losses, -8.02%. With the Russell 3000 up +7.89% for the quarter, short sellers underperformed the market by -0.13%.
There were 7,666 shorted equities with positive P\L, producing +$29.5 billion in profits, +9.60%. The largest short-side winners in the 1st quarter were: ABNB +$913mm. TAL +$449mm, DISCA +$447mm, GOTU +$421mm and INTC +$392mm.
There were more unprofitable shorts than profitable shorts in the 2nd quarter but not to the extent we saw in the 1st quarter with 9,226 securities in total, producing -$122.9 billion of losses, -14.28%. The largest short-side losers in the 1st quarter were AMC -$4,380mm, NVDA -$1,876mm, AAPL -$1,835mm, AMZN -1,810mm and MSFT -$1,809mm.
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Research Note written by Ihor Dusaniwsky, Managing Director of Predictive Analytics, S3 Partners, LLC
For deeper insight into short side data and analysis contact me at Ihor.Dusaniwsky@S3Partners.com
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