- Professional short selling firms ramp up short positions as meme stocks recede
- Short sellers however are still at a historically lower level than they had been before they were burned by the meme stock trade of early 2021, concentration has also decreased
Since the Reddit horde forced professional short sellers back into their caves, the recent decline in retail Reddit trader favorites like AMC Entertainment (+15.28%) and GameStop (+7.51%) have emboldened their comeback.
Twelve months after being routed by day traders on Reddit’s now infamous r/WallStreetBets channel, professional short sellers are back in full force, furiously reloading bets against a stock market more richly priced as any in two decades at a time when retail is running out of ammunition.
With the stimulus checks spent and the U.S. Federal Reserve tightening, short sales increased at their fastest clip in over a decade during the first five weeks of this year, according to data compiled by Goldman Sachs’ (+1.20%) prime brokerage.
The Russell 2000 Index of small cap stocks, a favorite amongst the retail crowd, is already in a bear market, in a sign that institutional investors are flexing their muscle after being cowed by retail traders in early 2021.
But investors looking at the data and assuming that the advantage has been ceded entirely to the short sellers should also note that the increase is coming on the back of subdued levels, possibly because of last year’s crush.
And the average stock’s short interest equals less than 4% of shares outstanding at the end of last month, near their lowest level in almost two decades, according to data by Leuthold Group.
American investors also have substantial savings, and even the most plucky hedge fund manager will be wary to add to the cautionary tale spun by Melvin Capital which lost almost half of its capital in the short squeeze of 2021.
Short sellers, perhaps scarred by the experience of early 2021, are also staying away from the smaller caps and focusing on larger-cap stocks, with concentration coming down significantly, to avoid drawing unnecessary attention to themselves.
