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

As Santa Claus prepares his eco-friendly, reindeer-powered sled to deliver gifts to investors this week, what companies are the grinches – short sellers and their minions – targeting in December? Data-analytics firm S3 Partners, and a few other sources can tell us.

Market level

Short interest for the iShares S&P/TSX 60 ETF (XIU-T) was $2.1-billion on Dec. 21, compared to $2.5-billion 30-days ago – a less bearish stance on the direction of the market. About three-quarters of the drop was due to short covering; the rest was due to a decline in the price of XIU.

Sector level

Options trade on several sector ETFs. A large number of call options purchased relative to put options could be a bullish signal for the ETF; vice versa, a relatively large number of put options could be a bearish signal.

According to data from the Montreal Exchange, the CI Galaxy Ethereum ETF (ETHX-T) and two other cryptocurrency ETFs are attracting a relatively large number of call option trades. Could this bullish sentiment be a sign of an impending turn around?

The iShares S&P/TSX Energy Index (XEG-T) and BMO Equal Weight Banks Index (ZEB-T) ETFs are showing a relatively high number of put option trades. Could this bearishness be a sign of weakness ahead for the energy and banking sectors?

Company level

Lion Electric Co. (LEV-T) experienced a sudden jump in short sales to 23.7 per cent of float and has an elevated cost to borrow shares of 20.1 per cent. Its stock is down almost 80 per cent during the past 52 weeks and a new offering of shares was recently announced.

Air Canada’s (AC-T) short position fell to 17.3 per cent, continuing its downtrend after more than a year at the top of the most-shorted list. Given Air Canada’s average daily trading volume, it would take short sellers 129 days to buy back their positions – so a sudden burst of short covering could put upward pressure on the stock, if not heighten the risk of a short squeeze.

Short interest was relatively high at Meta Materials Inc. (15.3 per cent), Briacell Therapeutics Corp. (13.9 per cent) and Frontera Energy Corp. (13.2 per cent). Meta Materials and Briacell also had high costs to borrow their shares, 91.3 per cent and 28.7 per cent, respectively, which means the risk of a short squeeze is present. Frontera’s days-to-cover ratio is high at 63.

Since short sellers need to borrow a stock before they can sell it short, 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 bearish on the company. If the cost is extremely high, short sellers might feel pressure to buy back shares and return them to the lender.

Notes on methods:

1. Some short positions may be linked in part to hedging/arbitrage positions, which are not purely bearish bets.

2. Short positions in inter-listed stocks were summed across exchanges in Canadian dollars.

3. When an investor purchases stock that was sold by a short seller, it creates a synthetic long position. If these long positions are not included in the float count, the percentage-of-float-short metric can be overstated; however, most of the time, the magnitude is not significant.

4. 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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