Short sellers are betting against the US stock market more aggressively than ever - even while stocks keep climbing.
The proportion of S&P 500 stocks held as short positions is nearly 3.79% of their freely traded shares, a record in data compiled by S3 Partners LLC since 2010. The broader Russell 3000 index recently saw its short-interest percentage climb to 6.3%, also a record.
What Short Sellers See That Others Might Not
Short selling is a bet that a stock's price will drop. You borrow shares, sell them, and hope to buy them back cheaper later. The data firm S3 Partners says the number of stocks being shorted has increased across the board.
In fact, by late June, short interest had reached 9% of shares outstanding on the New York Stock Exchange. For context, that is higher than the 5% level during the Global Financial Crisis and the 6% seen during the Covid-19 pandemic.
So why are investors suddenly so skeptical? A primary factor is concern that AI investments may fail to generate the expected returns. The S&P 500 had gained 18% from late March to the time of this article, largely driven by AI hype.
But last week alone, the index fell 1.6% on AI-related worries. Concerns about whether companies will actually make money from all that spending on chips and data centers are growing. Add in competition from China and big swings in semiconductor stocks, and you get a lot of doubt.
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Ihor Dusaniwsky, who manages predictive analytics at S3 Partners, put it plainly: "Short selling has increased and the breadth of names shorted has increased."
The Stocks Getting Hammered
The record short interest is not spread evenly. Some companies are getting crushed.
Hertz Global Holdings has seen its stock drop 65% so far this year. Approximately 79% of the company's shares are in short positions. Among other stocks with large short positions are Eos Energy Enterprises, Once Upon a Farm, and Dave & Buster's Entertainment.
Even a titan like SpaceX is feeling the heat. The private space company is one of the most shorted US stocks, with nearly 29% of its freely traded shares sold short. Short sellers are sitting on a mark-to-market profit of $4.8 billion so far this year.
Chipmakers like Micron Technology Inc. and Broadcom Inc. also carry huge dollar-value short interest, along with the seven major tech stocks known as the Magnificent Seven. Brian Reynolds, chief market strategist at Reynolds Strategy, described the trend as having "gone vertical."
What This Means for Your Portfolio
Record short interest sounds scary, but it is not a guaranteed sign of doom. In fact, some analysts see it as a potential setup for the next leg up.
Here is the logic. A huge pile of short bets means a lot of investors are betting against stocks. If those stocks do not fall, short sellers eventually have to buy back shares to close their positions. That buying can push prices higher - a dynamic known as a short squeeze.
Joseph Saluzzi, a partner at trading firm Themis Trading, says the rise in short interest is "a sign of investor worry." He notes that while anxiety remains limited to the broader market at present, "earnings season and geopolitical concerns will be big factors for the rest of this month."
On the other side, Reynolds thinks retail investors and stock buybacks will help lift stocks if they dip. "We continue to believe that retail investors will persist in taking stocks to new highs over time, and that buybacks will accelerate on any downturn, helping to lift stocks off their lows," he said.
The bottom line: Record short bets do not mean the market is about to crash. They mean the crowd is divided. Some investors are worried about the payoff from AI investments, while others remain optimistic. For investors, the real question is which side is right - and that answer will come from earnings reports and company results in the weeks ahead.
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