Even though the ASX 200 is up strongly from its February lows, short sellers – those investors who have sold a stock they do not own – have substantially increased their positions to historic highs.
That’s a “striking aspect of the Australian equities market right now”, said Olivia Engel, State Street Global Adviser’s head of active quantitative equity for the Asia Pacific region.
In a note Engel said that “short interest is 14% higher than it was a year ago”. That’s a “substantial $30 billion bet against” the stocks the short sellers are targeting, she added.
She suggests that the level of short selling could suggest a negative outlook for stocks.
“Given the difficulty and costs of borrowing stock and selling short, and with the potential for unlimited losses if the share price increases, short-sellers are often thought of as being relatively informed: they are usually institutional investors or hedge funds,” Engel said.
“If so, the direction and level of their positions may also be indicative of future share-price performance.”
The banks are under the most pressure from the short sellers at present with Engel noting that “in dollar terms the short-selling has been concentrated in Financial stocks”, mainly the banks.
Engel said the recent bounce in bank stocks after “poor interim bank results are probably a symptom of above average short interest in the sector”.
The main point though, Engel says, is that research undertaken by SSGA in the past shows that “higher levels of short interest often coincide with increases in the volatility of share prices”.
Traders and investors on the ASX, especially bank shareholders, would probably agree.