SHORT STACK: What the Australian market is betting against this week

The Shortfin Barracuda. Photo: DCNS.

Welcome to the first in a new series looking at the short side of the market – the side where the bears lurk and traders believe they have an insight that tells them which companies are over-valued, have flawed business models, or are just an accident, and a fall in the share price is looming.

Short sellers profit from falling prices. But because their positions are available to other market participants – at least in aggregate – they often provide a service to other investors by highlighting that maybe everything is not as rosy in a business as it seems.

Of course we all like stocks to go higher, so short sellers are often not very popular. And not always right. The data here is courtesy of Angus Nicholson, analyst at IG Markets.

This week’s big movers

When you look at the moves in short positions over the past week it’s pretty clear the market has been rallying. With the exception of Asciano, which had a monster 218% increase in shorts – from a very low base, the big moves have all been reductions in short positions.

The top five reductions in short positions have all been greater than 50% over the past week, while the majority of increases in shorts have been just single digit moves.

Here are the top 10 stocks by percentage decrease and increase in short positions.

Source: IG, ASX

Stocks of the week.

Asciano: The total short, even after the 218% increase, is very low, says Nicholson. He points out the stock has been “traded pretty consistently between A$8.50 and A$9.00 as people expect Brookfield’s buyout offer (now also involving Qube) to go ahead for the company”.

But he also says “the last time we saw a similar sized build in short positions in the stock in April, it promptly lost 3.6%”.

Clearly there is a subset of market players who believe the risk-reward trade in the face of potential ACCC concerns over Brookfield being able to operate the combined rail networks is to sell with a known stop-loss against the risk the deal does not complete – or more correctly that the market starts to believe there might be a hiccup, which will weigh on the share price.

Nicholson says “Asciano is set to face court on Wednesday in a case brought by private firm ACFS who accuse Asciano of breaching the agreement of their joint venture”.

Asciano Daily (IG)

Premier Investments: Smiggle’s strength earlier this year helped turn the tide for Premier’s stock price, Nicholson says. But the rally ran into a wall around the $17.50/60 region and fell back as traders took profits and the short interest increased.

However, Nicholson says “the big reduction in short positions over the past week appears to indicate that investors are increasingly happy with the current valuation. A$15.50 seems to stand out as a key level where investors may be closing out their short positions whenever the stock has dropped below it in the past week”.

Premier Investments (IG)

You can follow Angus on Twitter: @ANicholson_IG

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