Short Sellers Gained $10 Billion in Second Quarter Despite S&P 500 Rally

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(Bloomberg) — Short sellers had a lucrative second quarter this year, managing to successfully bet against stocks even as the overall market continued to grind higher. 

Short sellers, who borrow and then sell stocks in a bid to make money from price declines, amassed $10 billion in second-quarter paper profits, according to data from S3 Partners LLC. Paper earnings from sectors such as industrials, health care and financials offset a $15.7 billion mark-to-market loss in technology, said Ihor Dusaniwsky, managing director of predictive analytics at S3. 

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“They were really good stock pickers in this quarter,” said Dusaniwsky, pointing out solid trades in companies such as IBM Corp. and Cloudflare Inc., which slid during the quarter.   

Short sellers’ ability to reap profit as the market rallied signals that investors are flocking to just a few megacap technology stocks amid an uncertain macroeconomic backdrop, leaving some areas of weakness in other sectors. 

The S&P 500 Index rose 3.9% in the quarter that ended June 28, led by a nearly 37% jump in shares of Nvidia Corp. The tech-heavy Nasdaq 100 Index gained 7.8% in the same period.  

“This has been the narrative, that the market is too narrow,” said Quincy Krosby, chief global strategist at LPL Financial. “There’s a growing consensus that the clock is ticking on the hegemony of those names.” 

Still, there’s evidence that short sellers were putting money to work in sectors that gained during the quarter. The contrarian traders piled $33 billion into the information technology sector, according to S3, with most bets against Google parent Alphabet Inc., Meta Platforms Inc. and Netflix Inc., as the stocks rose. 

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The group also actively added to bets in underperforming sectors, including financials, consumer staples and consumer discretionary. Tesla Inc. was also an outlier — though most short sellers piled into bets against the consumer discretionary sector — the group covered shorts, or bought back stock to exit trades, of Elon Musk’s electric-vehicle company to the tune of $2.2 billion. That knocked Tesla from being the largest short in 2023 to the fourth biggest this year. 

Meanwhile, the energy sector saw the most short covering in the second quarter.

Dusaniwsky credits some of short sellers’ success to putting more weight on market momentum when deciding how to trade. 

“The market velocity is almost more important than the underlying fundamentals of the company,” he said. “We see longs and shorts going into the flow much more than they used to.” 

Of course, that momentum can shift on a dime, and Krosby warns of a coming transition period. Second quarter earnings are on deck, and any disappointment in the top tech companies could quickly send shares lower. In the mix is also the Federal Reserve and when they will deliver an interest-rate cut. 

“It’s almost like you’re at the beach and the sands are shifting on you,” she said. “You have to be very careful.” 

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