What Happened to All the Stock Market Short Sellers?

Hey guys, Brian here. I hope your week’s going great.

Quick video today to talk about short sellers. This is a segment of investors who, to my eye, have capitulated entirely to the bull market. This has happened in the past.

I’ve got a few charts that I think are telling us something important about sentiment. Stay with me.

All right guys, welcome back. Let’s just set the table here with some recent statistics on short selling. So, we’re talking about borrowing and selling shares to profit from a decline. I found some of these to be fairly incredible.

Hedge funds dedicated to short selling: There were 54 in 2008. Now just 14 as of June this year. Funds with a short bias, right? Assets down to 4.6 billion. It was 8 billion in 2008. So, nearly cut in half. Short interest in a typical S&P 500 company: lowest in more than two decades.

This, by the way, is not just a U.S. phenomenon. Financial Times in the U.K., just reported on so-called activist campaigns. So, these are funds that actively try to find flawed companies and bet against them. Slowest pace of growth in a decade. One U.K. fund executive said, “Shorting any UK mid-cap right now is insane, literally insane.” That’s a direct quote.

So personally, my ears perk up any time we see widespread capitulation, long or short. And we can see this capitulation with a few charts here. Steve and Pete published these two in the latest Financial Forecast (subscription links below).

Top graph here, short interest in the S&P tracking ETF: lowest in at least six years. Just dipped below 20% of shares outstanding. Same trend, more or less, for the NASDAQ tracking ETF. Short interest down below 9% of outstanding shares.

Like I said before, it’s not just U.S. traders that are terrified of getting caught short. Europe, too. This is the Euros Stoxx 600 on the top. Bottom graph is short-loan values as a percent of market cap in Europe: lowest since at least 2014.

Now, obviously this is not a perfect indicator of tops or bottoms. But notice here, Wave 3 back here in 2015. Top when short loans dropped below 20%. Wave 5, same thing. And right now, we see the lowest value of short loans, lower than those previous tops. So, the shorts have gone extinct.

Don’t take my word for it, by the way. Bloomberg said the same thing in a recent headline. You may know Jim Chanos, right? Famous short seller, got very famous when he bet against Enron 20-plus years ago. For 40 years, Chanos has made money on the short side during both bear markets and bull markets. That’s not easy. He says last year he was forced to shut down his fund, and the way he put it on a recent podcast, investors have just given up on the short side.

So, very possible that the business of shorting is due for a revival in a long period of out performance. I don’t know.

Let me know what you think in the comments. Thanks for watching. and I will see you in the next video.