Short sellers feel the pain in the stock market’s 2023 rally, says the Wall Street Journal.
The market’s comeback in 2023 has been difficult news for one group of investors: short sellers.
Short sellers profit from the declines in the market, which we saw much of in 2022.
However, the stock market has been performing surprisingly well this year despite talks of a looming recession.
The Wall Street Journal reports that short sellers are down $81 billion this year alone as the markets begin to bounce back.
“Short sellers who have incurred hefty losses are actively trimming their positions”, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.
“Investors betting against stocks have racked up $81 billion of mark-to-market losses on short positions this month through Thursday after accumulating $300 billion in gains in 2022”, Mr. Dusaniwsky said.
Experts are expecting heavily shorted stocks to squeeze as more short sellers begin to close their positions.
Is short squeeze season here?
Investors and analysts say the rally appears to be driven by a few things.
Signs that inflation is cooling have stoked bets among investors that the Federal Reserve will pivot from raising interest rates to cutting them as soon as the second half of the year.
That has helped risky assets across the board rise.
Especially risky corners of the market, such as stocks with high short interest, have rallied even more.
Analysts say that has likely forced short sellers to close out bearish positions to cut their losses — resulting in what is known on Wall Street as a short squeeze.
Retail favorites such as AMC stock, MULN, and others seem to have bottomed out earlier this year.
It’s very possible heavily shorted stocks such as AMC entertainment squeeze short sellers again this year.
“We’re seeing a mirror image of the performance within the equity market. The worst performers last year have been leading this year,” said David Lefkowitz, head of Americas equities at UBS Global Wealth Management. “It does look like some re-risking and short covering.”
“A lot of these stocks rallying were highly shorted, long duration names with earnings way out in the future. With a significant decline in the discount rate, those earnings are now worth more,” said Sameer Bhasin, principal at Value Point Capital, a New York-based family office.
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