Short bets on US stocks surge to USD 1 trillion, highest since April 2022

In 2023 US stocks have experienced gains driven by stronger-than-anticipated earnings and a recent surge in the technology sector. Despite concerns of a potential recession due to the Federal Reserve’s aggressive interest rate hikes, the S&P 500 defied expectations and technically entered into a Bull market this month. The S&P 500 Index is a widely followed stock market index in the United States. It measures the performance of 500 large-cap companies listed on major US stock exchanges. 

Despite incurring losses surpassing USD 100 Billion, short sellers continue to increase their bets against US stocks. According to the data from S3 Partners LLC, the total US Short interest, which represents the amount traders have spent on betting against US entities exceeded USD 1 trillion this month. The recorded figure marks the highest levels since April 2022, though it has slightly declined as stocks experienced a third consecutive day of decline. 

Some traders, adopting a contrarian approach, are making bets that indicate their belief that the S&P 500’s 2023 rally, which has amounted to approximately 14% will eventually lose momentum. However, as they patiently waiting for the market to reverse in their favour and they are experiencing a significant loss. According to S3 data, these positions have resulted in a paper loss of approximately USD 101 billion this year. 

According to the market analysts the interconnection between the market’s success and the growing pessimism that arises as the market continues its upward trajectory. The development of bearish sentiment can actually provide support for the market. If the shorts seller continues to be on the short side which is the wrong side of the trade, they may need to buy back stocks to exit their position, which could further boost equities due to short covering. 

Wall Street analysts are concerned about the future direction of stocks. Despite the S&P 500’s robust performance, some experts believe that the bullish trend may continue. However, there are also bearish hands suggesting that stocks are ready for a decline. 

The stocks with the highest short interest including Tesla, Apple, Microsoft, and NVidia Corp. are prominently featured on this list, and short sellers continue to increase their position despite incurring heavy losses. 

On the stock of Tesla Inc traders have bet USD 26 billion against the stock this year and are carrying losses of more than USD 14 billion as the stock doubled, according to S3. There is little sign they are dumping the bets. On Wednesday the stock dropped due to Barclay’s analyst, said the EV market rallied too quickly and downgraded the stock to equal-weight from overweight.