Short interest in the domestic market increased by $10.2 billion, or +1.15%, to $899 billion in the fourth quarter of 2022. The increase in short interest was due to a generally up-trending market in the fourth quarter (S&P 500 up +7.08%, Nasdaq down -1.03% and Russell 3000 up +6.72%). The $10.2 billion increase was made up of $34.9 billion in shorted share price increases with an offsetting $24.7 million of short covering.

In October short sellers were shorting into rising markets, primarily in Consumer Discretionary and Industrials, even though the average short was taking losses to the tune of down -6.7% for the month. In August, a market wide short squeeze started, and short sellers responded with $34 billion of short covering, mostly in Financials, Health care and Industrials. And in September short sellers started looking for a floor and we saw a net increase of short selling, $4.7 billion, led by Financials and Industrials.

The sectors with the largest decrease in short exposure were Communication Services (-$4.5 billion), Health Care (-$3.5 billion) and Real Estate (-$1.3 billion). While the sectors with the largest increase in short exposure were Industrials (+$8.9 billion), Energy (+$3.1 billion) and Consumer staples (+$3.1 billion).

Short exposure continues to be concentrated in several sectors: Information Technology ($166 billion), Consumer Discretionary ($137 billion) and Health Care ($120 billion).

Short Interest Changes by Sector

Market wide Short Interest as a % of Float decreased in the fourth quarter with SI % Float declining by twenty-five basis points to 4.63%. The S3 SI % Float, which includes the synthetic long shares created by every short sale in the denominator, declined by twenty-two basis points over the quarter, from 4.41% to 4.19%.

Decreases in SI % Float while total short interest remains relatively stable indicates more shares being shorted in larger cap stocks with larger floats.

The sectors with the largest increases in SI % Float were Real Estate up +0.32% and Financials up +0.16%. And the sectors with largest decreases in SI % Float were Energy down -0.66% and Materials down -0.63%.

Stocks with over $100 million of short interest with the largest increase in SI % Float were: Silvergate Capital Corp (SI) 10.48% to 58.84%; Sitio Royalties Corp (STR) 18.15% to 41.79%: Carvana Co (CVNA) 32.18% to 52.46%; Vivant Smart Home Inc (VVNT) 10.85% to 30.75%; and Marathon Digital Holdings (MARA) 29.63% to 40.87%.

Stocks with over $100 million of short interest with the largest decrease in SI % Float were: Earthstone Energy Inc (ESTE) 31.49% to 14.17%; Asana Inc (ASAN) 31.32% to 16.34%; Mister Car Wash (MCW) 19.45% to 5.71%; Olaplex Holdings (OLPX) 17.07% to 3.65%: and Lucid Group Inc (LCID) 23.38% to 10.46%.

Short Interest % of Float

Short sellers found it slightly less expensive, on average, to short stocks in the fourth quarter with the average stock loan fee decreasing +2bps from 0.68% fee to 0.66% fee.

Stocks with over $100 million of short interest with the largest increase in stock borrow fees were: Beyond Meat Inc (BYND) 20.82% to 102.57% fee; Nikola Corp (NKLA) 7.82% to 40.07% fee; AMC Entertainment (AMC) 16.82% to 44.32% fee; MicroStrategy Inc (MSTR) 21.32% to 43.82% fee; and Carvana Co (CVNA) 1.19% to 13.07% fee.

Stocks with over $100 million of short interest with the largest decrease in stock borrow fees were: Casava Sciences Inc (SAVA) 45.32% to 15.32% fee; Riot Blockchain Inc (RIOT) 17.07% to 5.57% fee; Amylyx Pharmaceuticals (AMLX) 10.82% to 0.70% fee; Ventyx Biosciences Inc (VTVX) 6.07% to 2.07% fee; and B & G Foods Inc (BGS) 7.82% to 4.07% fee.

Changes in Stock Borrow Fees

Overall short sellers paid $1.54 billion in stock borrow fees in the fourth quarter of 2022 (calculated daily borrow cost using S3’s daily offer rate and daily shares shorted numbers) versus $2.12 billion in the third quarter. The ten stocks that short sellers had the most conviction and paid the most to short made up 23% of the total borrow cost in the quarter. The stocks with the largest quarterly short financing costs were: MSTR (-$70mm), BYND (-$46mm), AMC (-$41mm), SIRI (-$34mm), GME (-$32mm), LCID (-$31mm), UPST (-$28mm), SAVA (-$27mm), FSR (-$21mm) and NKLA (-$17mm).

Even after paying away $70 million in stock borrow financing costs, MicroStrategy Inc (MSTR) short sellers still ended up +$164 million in net-of-financing profits, up +23.46% for the quarter. But sometimes high financing costs can turn a winner into a loser. Beyond Meat Inc (BYND) shorts paid $46.0 million in stock borrow costs which turned $42.9 million in mark-to-market profits into a net-of-financing -$3.1 million loser, -0.94%, for the quarter.

Unfortunately, high financing fees can also exacerbate poor returns. Sirius XM Holdings (SIRI) shorts were down $26.9 million in first quarter mark-to-market losses but added $34.1 million of quarterly financing costs to push their net-of-financing mark-to-market losses to -$61.0 million, down -5.1%.

High stock borrow fees can test the conviction level of short sellers as financing costs can take a large bite out of expected Alpha. The highest stock borrow fees, as of December 30, for stocks with over $100 million of short interest were:

Short sellers were down $43.5 billion in fourth quarter net-of-financing mark-to-market profits, down -4.87%, versus up +$40.8 billion, +4.46%, in the third quarter. With the Russell 3000 up +6.72% for the quarter, short sellers again outperformed the market significantly.

There were 7,239 shorted equities with positive P\L, producing +$52.5 billion in mark-to-market profits, +19.4%. The five largest short-side winners in the fourth quarter were: TSLA (+$10.19bn +72.50%), AMZN (+$2.19bn +29.11%), AAPL (+$1.16bn +7.12%), LCID (+$0.99bn +63.96%) and COIN (+$0.90bn +54.53%).

There were 9,910 shorted equities with negative P\L, producing -$96.0 billion in mark-to-market losses, -14.47%. The five largest short-side losers in the fourth quarter were: V (-$1.28bn -16.72%), MRNA (-$1.02bn -38.77%), XOM (-$0.85bn -19.20%), NVDA (-$0.77bn -15.59%) and BABA (-$0.75bn -14.65%).

There were more unprofitable shorts than profitable shorts in the fourth quarter with 50% of all short positions adding negative numbers to a trader’s bottom lines, 37% with positive numbers and 13% were flat for the quarter.

There was only one profitable sector on the short side with Consumer Discretionary shorts up 3.27% for the quarter. The least profitable sectors on the short side were Materials (-12.65%), Energy (-12.25% and Industrials (-9.13%).

Short Selling 4Q22 P&L by Sector