Stock-Market Rally Costs Bears $120 Billion

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Investors have been ramping up bets against stocks—and they are getting burned.

Total short interest in the U.S. market topped $1 trillion this month, hitting the highest level since April 2022, according to data from S3 Partners. That is up from $863 billion at the start of the year and represents about 5% of all shares that are available to trade.

Short sellers borrow shares and then sell them, hoping to buy them back at a lower price later and pocket the difference. They have added to their bearish wagers in recent weeks, while the S&P 500 climbed to a 14-month high. The index is up 14% in 2023 and 5% in June alone.

That rally has been punishing: Short sellers have incurred roughly $120 billion in mark-to-market losses this year, including $72 billion in the first half of June, according to S3.

More..

https://archive.is/PusHI

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1. Interesting on shorting inverse ETFs ...

Together, big-tech stocks are responsible for almost all of the S&P 500’s gains.

... The most popular short trades have inflicted outsize losses on investors: A Goldman Sachs Group index tracking the 50 most-shorted stocks in the Russell 3000 has advanced 20% this year, outpacing the S&P 500.

... And some of the popular ETF short trades have looked more like long positions in practice. Two of the three most profitable on a percentage-gain basis in May were investors shorting inverse ETFs, or those that seek to provide the opposite return of their underlying assets.

An investor can theoretically outperform a benchmark by shorting an inverse ETF that tracks it, taking advantage of the tracking error that causes an inverse ETF to drop by more than the percentage that the asset it tracks rises.

Credit: Jack Pitcher, Wall Street Journal, and S3 Partners, 6/20/23