Over the past month, we’ve seen the coronavirus become pandemic, oil prices collapse and stock markets plunge. With this much gloom, one might expect short sales of TSX stocks to be a lot higher now. But data sources show they have, in fact, fallen back.
Consider the benchmark iShares S&P/TSX 60 Index ETF. Its short position as of mid-March stood at 24.2 per cent of freely floating shares, which is slightly lower than the mid-February reading of 24.7 per cent, according to data from S3 Partners.
As for individual stocks, there were also declines.
For example, Cronos Group Inc., which is at the top of this month’s table of the 20 most shorted stocks, had 37.6 per cent of float sold short whereas last month’s top entry, Tilray Inc., had 42.6 per cent short.
Why fewer short sales? It could be a behavioural thing: short sellers have suffered though a long bull market and when some nice gains appeared, there may have been be a tendency to quickly take profits. Also, the liquidity generated by a selling panic makes it easier to close positions.
Short sellers are sometimes accused of profiting from the misfortunes of others, so the restraint shown so far will be welcomed by many observers. But policy makers and market players are nonetheless still taking steps to limit short selling.
Short-selling bans of varying length and breadth have been imposed in France, Italy, Spain, South Korea and China. In addition, some pension funds have suspended their stock-lending programs and recalled shares loaned out to short sellers – a notable case being UniSuper Management Ltd., which is a superannuation fund for academics in Australia.
Some of the companies on the table of the 20 most shorted companies did have increases in short interest. One of the more notable was Alpha Pro Tech Ltd., which is making its first appearance since these monthly updates began nearly two years ago.
Alpha Pro Tech supplies weather-resistant building products and disposable protective apparel such as lab coats and proprietary face masks that protect against viral infections such as the coronavirus. Mainly because of the production of these face masks, its stock nearly quadrupled in value over February.
However, after short sellers crunched the numbers and did their due diligence, they determined that the escalation in price had gone too far in valuing the expected increase in sales and earnings. This can happen when practitioners of momentum and technical analysis pile into the upward trend in a stock.
The next two tables show the i) 5 largest short positions in terms of their dollar value and the ii) 5 largest increases in short positions by dollar value. They screen out companies with less than 5 per cent of float short because a large short interest by itself may simply reflect a large number of shares trading, not necessarily bearish sentiment.
Cineplex Inc. is one of the companies with a huge leap in the dollar value of its short position over the past three months. This is no doubt related to the coronavirus discouraging the viewing movies in a theatre and the subsequent closing of those theatres. Additionally, Cineplex is being acquired by Cineworld PLC but short sellers like Hindenburg Research believe the takeover deal could fall apart, or else go though at a lower price.
As mentioned in past updates, a large short position is not always indicative of substantial bearish sentiment or an impending decline in stock price. It can alternatively reflect a hedge or arbitrage on convertible securities.
A large short sale is also at risk of producing a short squeeze. This is an upward spike in stock price caused by short sellers rushing to buy back the shares they borrowed. A good news item is often the trigger.
Lastly, while academic studies have found that short sellers are informed and savvy traders, this is relative to market performance. In a rising market, shorted stocks can still go up on average – just less than the benchmark market indexes. But money can still be made if the short position is offset with a long position in a stronger stock or a market-tracking ETF.