Short Bets Against US Market Rise $2.7 Billion in Volatile August

The Spider S&P 500 ETF (SPY), which tracks the S&P 500 index, has seen $2.68 billion of additional shares shorted in just three weeks, according to a report from S3 Partners about volatile ETF short side activity.

Published on August 21, the report stated that the SPY exchange-traded fund continues to be the largest portfolio hedging vehicle with total short interest of $40.3 billion and short interest as a percentage of float at 15.48%. A period of heightened volatility for the U.S. market increased the need for SPY additional delta hedging, according to the note. Analysts have turned more cautionary as the U.S.-China trade war looms, and market watchers cite slowing economic growth, inflated valuations, and other concerns. 

Short sellers also targeted Bond ETFs this month, with the iShares iBoxx High Yield Corp Bond ETF (HYG), iShares iBoxx $ Inv Grade Corp Bond ETF (LQD), iShares 20+ Year Treasury Bond ETF (TLT), and Vanguard Total Bond Market ETF (BND) seeing an increase of $1.5 billion in short interest.

The financial technology and analytics firm pointed out that although there is one less fixed income ETF in the current top 20 most-shorted ETF ranking, short interest of the five that remain is $857 million larger than the six in January’s top 20.

Short covering, or the practice of buying back securities to close an open short position, saw little activity in the first three weeks of the month. Invesco’s QQQ Nasdaq 100 ETF (QQQ) led the group with a modest $174 million in net short covering over the three week period ended August 21. Three China-based ETFs had $121 million in collective short covering in August. This short covering saw their net short interest decrease by 16% to $628 million. 

While more investors are betting against the U.S. market than normal in August, markets were up last week. U.S. equities continued their rebound as fears of a possible recession eased and the Fed stuck to its dovish stance. U.S. stocks also got a boost by an announcement that the U.S. agreed to extend a temporary reprieve to Chinese telecom company Huawei Technologies. 

According to S3, 95 million short shares were covered last week, worth just over $7 billion. “With the markets up for the week, equity short sellers did not fare well losing -$9.74 billion in mark-to-market losses on an average total short interest of $820.4 billion, -1.19%,” it said in a August 23 note.

That said, some aren’t too sure the good times will last long, especially considering the escalating trade war. “We’re seeing more stabilization, and it’s really off the back of more stimulus in the air,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities, per CNBC. “We’re just taking a little bit of a break but I’m not entirely convinced that the move lower on rates is over.”