The Energy sector reversed its year-long price weakness and has rallied significantly in November with the Energy Select Sector Spider (XLE) up +28% for the month. Rumors that sector wide short covering was one of the main drivers for this price upswing are not backed up by short side trading activity. The net change in shares shorted for the over 700 stocks in the sector was $394 million of net short covering and therefore the Energy sector shorts were a negligible factor in the rally. The rally in the Energy sector was primarily driven by long side buying, as traders rotated into an under-performing and under-owned sector of the market.
Short interest in the Energy sector is $27.84 billion; 4.73% short interest % of float; 4.30% S3 short interest % of float (which includes “synthetic longs” created by short selling in the float).
51% of the stock in the sector had net short covering for the month versus only 32% with net short selling (17% had no change in shares shorted). The stocks with the largest increase in shares shorted are:
The stocks with the largest decrease in shares shorted are:
With the sector up 28% for the month of November the Energy sector was not a friendly place for short sellers. Overall, Energy sector shorts were down -$6.35 billion in net-of-financing mark-to-market losses, a sector wide return of -24.2%. Only 15% of the shorted stocks in the sector were profitable totaling just +$30 million in profits, and only eight made over $1 million in mark-to-market profits. 20% of the stocks had no mark-to-market P\L while 65% were losing trades for shorts, totaling -$6.38 billion of mark-to-market losses.
Energy Sector Short Winners:
Energy Sector Short Losers:
Yes, shorts got burned in the Energy sector in November, but no they did not exit their trades in size and cause the November market rally. $394 million of net short covering could not be the catalyst for a month long sector wide rally.
This was not a market wide short squeeze, even with November’s -$6.35 billion in mark-to-market losses Energy sector shorts are still up +$20.28 billion, +56%, in year-to-date net-of-financing mark-to-market profits. With such a large cushion of profits, there no need to rush for the exits and create a tsunami of short covering in the sector, but that does not mean that short sellers will stay in their trades forever.
If the Energy sector continues to rally, we should see more short covering as shorts begin to realize their year-to-date profits and rotate into other more attractive sectors. In November, the sectors with the largest increase in net short selling were the Communication Services, Information technology, Consumer Discretionary and Consumer Staples sectors. Sectors with net short covering along with the Energy sector were the Industrials, Materials, Health Care and Utilities sectors.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. 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 information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks, and merits, as well as the legal, tax, accounting, and investment consequences, of such decisions.