How the stock market is boosted by short sellers

Big tech names led the stock market’s massive gain in the first half of the year. As the breadth of the market rally widens, another group is also contributing to the upside: heavily shorted stocks.

The market’s upside moves were exacerbated by short sellers placing downside bets on these stocks, forced to hedge their positions. Short hedging refers to the practice of buying back borrowed stock to close out an open short position.

“As expected, shorts are being squeezed into these losing trades and we are seeing short hedging in these stocks – helping to drive stock prices even higher alongside the long-term buying momentum we are seeing on these stocks. stocks,” Ihor Dusaniwsky, managing director of S3 Partners, said Yahoo Finance on Wednesday.

Shares of crypto platform Coinbase (COIN) and car trading platform Carvana (CVNA) were among the best performers in the past month.

Carvana stock is up more than 90% in the past month.  REUTERS/Brian Snyder

Carvana stock is up more than 90% in the past month. REUTERS/Brian Snyder

Coinbase stock is up 70% over the past month while Carvana stock is up 91% over the same period. Short-term interest on these two stocks is currently above 20% and 54% of free float respectively, according to data analytics firm S3 Partners. (For perspective, these stocks are above the US market average of 4.99% short interest.)

Other short-seller favorites include artificial intelligence firm (AI), up 10% in the past seven sessions and up 259% year-to-date.

Even shares of electric vehicle maker Rivian (RIVN) have been on fire lately, fueled in part by short cuts.

The S&P 500 (^GSPC) is up 16% year-to-date, while the Nasdaq Composite (^IXIC) is up 32%, with much of the rally initially focused on a handful of names tech amid a frenzy over artificial intelligence, a heavily battered financials spin in March, and expectations that the Federal Reserve would pause rate hikes as inflation cools.

The scope of the market is slowly expanding with stocks outside of technology like GE (GE) and home improvement retailer Lowes (LOW) recently hit 52-week highs.

The higher the markets, the greater the risk for short sellers.

“As stocks rally, expect short pressure to tighten in these stocks and hedge buys to help drive stock prices higher as shorts reduce or exit trades altogether.” , said Dusaniwsky.

Ines is a senior economics reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

Click here for the latest stock market news and in-depth analysis, including events moving stocks

Read the latest financial and business news from Yahoo Finance

Leave a Comment