Short sales on the TSX: What bearish investors are betting against

What stocks are short sellers targeting on the Toronto Stock Exchange (TSX) these days? Let’s take a look at some highlights, based on data from analytics firm S3 Partners.

Short sales at the market level

Extrapolating from the short position on the iShares S&P/TSX 60 ETF (XIU-T), short seller sentiment on the direction of the TSX remains bearish. It was $2.67-billion on Nov. 23, slightly higher than $2.65-billion a month ago and noticeably higher than $2.3-billion three months ago.

Short sellers covered $150-million of their positions in the month to Nov. 23. But this did not reduce the aggregate short position because the S&P/TSX 60 Index rallied by 6.5-per-cent during the period and pushed up the value of the short position slightly more than the short covering.

Short sales at the sector level

Almost half of the ten most shorted ETFs are from the cryptocurrency sector. Could this signal that the crypto rout is still ongoing?

In the May edition of the Short sales on the TSX: What bearish investors are betting against column, a table ranking the most shorted ETFs had a similar preponderance of cryptocurrency ETFs – which proved prophetic. This month’s update of the table does not seem to be offering any relief.

Short sales at the company level

After more than a year, Air Canada (AC-T) finally yielded the top spot on the list of companies with the highest percentage of float short. Veritas Investment Research pointed out a couple of weeks ago that Air Canada’s third-quarter earnings report “demonstrates how well the company’s operations have recovered.” Veritas Investment has a buy recommendation on the stock and says: “All signs point to continued strong demand for travel, and a lengthening booking curve is likely to be positive for advance sales.”

Another indicator of short seller sentiment is the cost to borrow shares. A stock with a high cost to borrow usually means that short sellers are eager to borrow shares to sell short – but there aren’t enough loanable shares available to meet the demand.

Many companies on the list of the most expensive stocks to borrow have had borrow rates over 50 per cent on their shares for over a year or two – for example Chesswood Group Ltd.(CHW-T), Resverlogix Corp. (RVX-T) and Electrovaya Inc. (EFL-T). Some brokers, such as Interactive Brokers, share the borrowing fees with clients who are long such stocks.

It can also be useful to look at large changes in short positions over one- and three-month periods, especially if a large increase in the dollar value of short selling also represents a large percentage increase in the position. Some stocks on the tables with large jumps in short selling (greater than 50 per cent increase for 1 month or 75 per cent increase for 3 months) are: Agnico Eagle Mines (AEM-T), First Quantum Minerals (FM-T), Royal Bank (RY-T), Bausch Health (BHC-T), Turquoise Hill Resources (TRQ-T) and Horizons S&P/TSX 60 ETF (HXT-T).

A few methodological notes:

Some short positions may reflect in whole or part hedging and/or arbitrage operations, which are not purely bearish bets. Short positions in inter-listed stocks were summed across exchanges in Canadian dollars. Synthetic long positions occur when an investor purchases stock that was borrowed and sold by a short seller; they were excluded from stock floats for the sake of simplicity. The percentage of float short for ETFs is impacted by the ETF mechanism for creating/redeeming units, which results in almost daily changes in the number of units issued (as a result, the percentage of float short for ETFs may be more volatile than for stocks).

Larry MacDonald also writes at Investing Journey.

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