Short selling drops to lowest level since Lehman

Hedge funds have sharply scaled back their bearish bets that the value of stocks is about to fall, with the proportion of shares earmarked for short selling at its lowest level since before the financial crisis despite warnings of renewed market exuberance.

The percentage of stocks that have been borrowed by short sellers – who try to profit from a company’s share price falling – has dropped to the lowest level in the US, UK and the rest of Europe since the years before the collapse of Lehman Brothers, according to data compiled for the Financial Times by Markit.

The fall in short selling comes as Wall Street and markets in Europe trade at near record and multiyear highs, indicating that while some high profile hedge fund managers have warned of excessive market euphoria the industry is still unwilling to bet against the rally.

The amount of so-called short interest in the benchmark US S&P 500 index is hovering around 2 per cent of total shares in the index, close to the lowest level since Markit began collecting the data in 2006. In the European Stoxx 600 index, the level is similar at just over 2 per cent, while short interest in the UK FTSE All-Share index stands at less than 1 per cent.

This compares with sharply elevated levels in the years preceding the credit crisis, with the data showing short interest in the US in 2007 hitting a high of 5.5 per cent. The Markit data does not take into account all changes in stock indices over the period.

Buoyed in part by injections of cheap money from central banks, including the Federal Reserve’s asset-purchase programme, leading stock markets have continued to rise this year after enjoying strong gains in 2013, forcing some hedge funds to cut their short bets to avoid being squeezed.

As the FTSE All-World and S&P 500 have set records, volatility has faded away, with one measure, the Vix index or “Wall Street fear gauge” dropping to a near seven-year low.

This has prompted a string of recent warnings from a number of leading hedge fund managers such as Baupost’s Seth Klarman, CQS’s Michael Hintze and David Einhorn of Greenlight Capital about the distortions being caused by ultra-low interest rates and bubbles in some asset classes.

Closely-followed short sellers such as Mr Einhorn have argued that US technology shares have reached “bubble” valuations, but have bemoaned the difficulty of making bets against them given the level of hype surrounding the sector.
“It is dangerous to short stocks that have disconnected from traditional valuation methods,” Mr Einhorn told his clients earlier this year. “After all, twice a silly price is not twice as silly; it’s still just silly”.

However, despite a jittery period for some technology stocks in the first half, investors have been undeterred by the warnings, with some analysts arguing that shares are still cheap compared with other assets.

“Historically, periods of low volatility usually lead to further periods of volatility, they are not precursors to a crisis,” said Antonin Jullier, global head of equity trading strategy at Citi.

Mr Jullier said that some hedge funds had become discouraged from short selling as a result of being repeatedly wrongfooted by rising markets.

“Hedge funds have underperformed in the first half and this means their appetite for risk has fallen over the year,” he said.

Rising stock markets have coincided with sharp price increases for other asset classes, ranging from Jeff Koons’s sculptures to junk bonds and London house prices, prompting concerns among some investors that markets have lapsed back into complacency.

http://www.cnbc.com/id/101820597

 

Remember that the biggest short sellers use options (put options in this case), not the stock itself.

They use options to "cover" their activity...

 

You realize that for every put buyer there is a counterparty with the offsetting position in the underlying? Bearish bets on equities - through put options, short futures or outright short equities - result in the short selling of the respective underlying.

 

Where is it possible to get historical data for short selling interest in the US, which is % of market capitalization borrowed for short selling?

 

Yes, but the option writer could sell naked puts. Anyway, that's not the point, all I am saying is that the pros use options to make large bearish bets, instead of shorting the stock/index itself.

 

Exactly. It's funny how often people forget that every buy has a matching sell and then come up with all kinds of silly explanations for what's going to happen.

My favourite: the market can only go up because there is so much "cash on the sidelines". Whoever invented that phrase should be hanged by the balls (or breasts).

[For the confused: if you take $10 000 from your money market account to buy Amazon shares then the person who sold you those shares takes the $10 000 and sticks it in his money market account. There is still the same $10 000 "on the sidelines". THERE IS NO NEW MONEY IN THE MARKET. Now do you understand what the Fed is doing? Or not doing?]

 

The "option writers" and "pros" are the exact same group of people.

 

I invented that phrase what are you going to do about it!

If perma bears go extinct it will be interesting to see how ES, YM, etc. react as a lot of their runs higher have been fueled by short sellers suicideing themselves with buy stops.

 

Yes, bulls buying every dip and bears getting squeezed is the hallmark of a bull market, but in the early stages (2009) bears dominate for longer and the dips are bigger and scarier.

Every bull market ends when the bears have given up shorting..

 

Except for this one.

As long as we have central banks, we'll have a bull market.