Market record gains were uneven and heavily driven by semiconductors, up 32%, which accounted for 40% of NDX returns and 20% of SPX while many sectors fell.

Investors are using the SMH ETF to hedge sector risk as seen in the short interest rise while maintaining long-only conviction in individual, uncrowded semi stocks.

High-performing semi stocks and smaller semi companies currently face higher short interest, suggesting a prevailing reversal strategy despite recent momentum.

The market’s rally this past month was decidedly not uniform. With the QQQ up 15% and the XLK (Technology) surging 20%, there were many sectors trading down. The primary engine for the market was the semiconductors, which were up 32%.

If we remove the semis, we find the market looks completely different. In fact, 40% of the NDX return comes from the semis and 20% of the S&P 500 return, despite their relatively small weights in the indices.

When analyzing individual names, the real-time short interest was relatively unchanged, but within the SMH (Semiconductor ETF), the short interest rose by a very large amount. This indicates that investors were using the SMH to hedge the sector while potentially using individual names to go long.

At the same time, the shares outstanding for SMH increased, but not as much as the short position, resulting in a net shorter position.

The individual stocks are not crowded, and the short squeeze risk scores are not high. This move higher in individual semi stocks has been a long-only phenomenon. Historically, short interest % of float typically falls as prices rise during a momentum strategy, and this has happened here as well.

This has happened this past month, with short interest falling as prices rose, echoing the reversal pattern seen the month before.

Interestingly, the stocks that are up the most (orange) currently have higher short interest, showing there is a reversal strategy driving the semi stocks.

At the same time, smaller companies (blue) maintain larger short positions as a percentage of float, which is consistent with our other findings.

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