Record short sales defy market rally
Bearish bets on the direction of stock prices hit a record on the New York Stock Exchange this month, even as the market has continued to streak higher.
The number of NYSE-listed shares sold “short” climbed to an all-time high of 11.76 billion shares as of May 15, up 7% from 10.99 billion in mid-April, the NYSE said Monday.
Short sellers borrow stock, usually from a brokerage’s inventory, and sell the shares in the open market. The goal is to repay the loaned stock with shares bought later at a lower price.
If the market price of the stock falls, the short seller’s profit is the difference between the sale price and the price paid for shares used to repay the stock loan. But if the market price of the stock rises, short sellers can face unlimited losses until they close out their trades.
In recent years, investors and traders typically have pulled back from short sales when the stock market has rallied sharply. Not this time.
The NYSE composite stock index has surged 10% since mid-March, yet the number of shorted shares has risen nearly 12% in the period.
Analysts said one explanation was that many hedge funds -- private investment pools that can use any number of investing and trading techniques -- were shorting stocks as part of a strategy that bets on some shares to fall even as others rise.
That strategy also can use short sales as a way to offset the risk of a market decline.
“The more hedge funds you have, the more interest there is in shorting,” said Bill Strazzullo, a partner at Bell Curve Trading in Boston. But the increase in short selling may not indicate that the sellers believe the market overall is headed for a plunge, he said.
Whatever the reason for a rise in short sales, the borrowed stock eventually must be replaced. Buying to close out those trades can help boost the market, noted Todd Salamone, an analyst at Schaeffer’s Investment Research in Cincinnati.
“At some point they have to unwind those trades. That creates buying pressure,” he said.
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