By Karen Langley
Short sellers have revived their wagers against the stock market
in recent weeks, taking their most aggressive positions in
years.
Bets against the SPDR S&P 500 Trust, the biggest
exchange-traded fund tracking the broad index, rose to $68.1
billion last week, the highest level in data going back to January
2016, according to financial analytics company S3 Partners. That
was up from $41.7 billion at the beginning of 2020 and $41.2
billion a year ago.
Short sellers borrow shares and sell them, hoping to repurchase
them at lower prices and keep the difference as profit. Among the
individual companies they have targeted in recent weeks are
travel-related firms, including Carnival Corp., Royal Caribbean
Cruises Ltd., Marriott International Inc. and Wynn Resorts Ltd.
Those bets come during a wild year for investors who are
struggling to reconcile the impact of the coronavirus pandemic on
the population and economy. The S&P 500 suffered its fastest
drop from a record to a bear market in history -- ultimately
falling 34% between Feb. 19 and March 23. Its 28% rebound since
then has also been brisk, leaving some investors anxious about the
strength of the rally when so much remains unknown.
"We've really seen a significant bounceback in the last three
weeks at levels that I think are too quick," said Jerry Braakman,
chief investment officer at First American Trust. His firm recently
bet against the Nasdaq-100, on the belief that technology stocks
have fallen too little to reflect the probability of a recession.
The index is up 1.1% in 2020.
"When we see a strong move in one direction, where we think the
fundamentals and the news can turn ugly, especially during an
earnings cycle, we think that's an opportunity where we could see a
5,10% selloff again," he said.
Investors are bracing for the possibility of more volatility
this week, as earnings reports from companies including Coca-Cola
Co., Netflix Inc. and Delta Air Lines Inc. give another glimpse at
how the coronavirus is reshaping the landscape for U.S.
business.
The outsize market swings of late require vigilance from
investors who sell shares short because they can face losses when
prices rise. Short sellers incurred total mark-to-market losses of
$108.8 billion over three days in late March when the S&P 500
surged 18%, according to Ihor Dusaniwsky, head of predictive
analytics at S3 Partners.
But with the potential for additional declines ahead, many
investors have decided that the ability to hedge their portfolios
-- or simply bet on a selloff -- is wise.
"Things will go back to normal eventually and these positions
will decrease but not until we start seeing less volatility in the
market," Mr. Dusaniwsky said of the rise in short positions against
the SPDR S&P 500 Trust. "No one's going to give up their
insurance until they see the chances of catastrophe are in the
rearview mirror."
The portion of available shares sold short against the SPDR
S&P 500 Trust has also risen, climbing to 27% in early April,
the highest level since November 2016 and up from 14% at the
beginning of 2020.
The increase in bets against the market coincides with a push in
other countries to temporarily curb short selling. At times of
heightened volatility, critics often argue that the practice
exacerbates downward pressure on stock prices. But Jay Clayton, the
chairman of the Securities and Exchange Commission, has argued
short selling is needed to facilitate ordinary market trading.
To be sure, coronavirus has upended entire industries in recent
weeks, leaving investors scrambling to reassess the growth
prospects of companies from Marriott to Clorox Co. to Amazon.com
Inc. to Carnival.
With the pandemic devastating global travel, hotel, casino and
cruise stocks have been among the hardest hit -- and seen some of
the biggest additions to the short positions against them.
Many hotels and casinos temporarily closed their doors when
demand evaporated, furloughing employees and curbing spending
plans, and the Centers for Disease Control and Prevention has
extended a no-sail order for cruises into July.
Short sellers have added a collective $797 million to their
short positions against Carnival, Royal Caribbean, Marriott and
Wynn over the past 30 days, according to data Friday from S3
Partners.
Alex Lee, a San Francisco resident who manages a family sandwich
shop in Oakland, Calif., and his wife had previously dabbled in
short selling but have recently devoted more attention there. They
made bets against Marriott, along with other stocks.
"Because of Marriott's price at the time, it seemed like it had
more room to fall and because of its heavy presence in Europe and
the United States, we just thought that that company itself would
be more vulnerable to falling more," he said.
Over two rounds of shorting Marriott stock in March and April,
they made a profit of about $15,000, Mr. Lee said. Marriott
recently said about 25% of its hotels are temporarily closed and
North American occupancy levels are around 10%. Its shares are down
44% this year.
Among the stocks that saw big drops in short positioning in
March were stodgy consumer-staples shares, which got a bounce as
Americans stocked their pantries to wait out the pandemic at
home.
"We had a lifetime of trading in the month of March," said Mitch
Rubin, chief investment officer at RiverPark Funds. He said he had
previously bet against shares of Kroger Co., Walmart Inc., Clorox
and Campbell Soup Co. but covered those positions in late February
and early March as it became clear those companies would perform
well with consumers sheltering in place.
"Their business is healthier than it was before the crisis
because the demand for their products has increased," he said. "The
amount of times you clean high-touch surfaces with a chemical
disinfectant is going to go up for some period of time, maybe for
the rest of our lives."
Write to Karen Langley at karen.langley@wsj.com
(END) Dow Jones Newswires
April 19, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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