Investors are pursuing a momentum strategy, covering shorts on AI-driven winners (SNDK, WDC) while increasing shorts in declining names (IT, COIN).

A clear size effect is underway; large-cap stocks are seeing short interest fall as they rise, while smaller S&P 500 components face increasing shorts.

While Energy equities (XLE) show momentum "rally and cover" pattern, Oil commodity (USO) shows a reversal play, with short interest rising.

Since the beginning of the year, the average S&P 500 short interest has remained virtually unchanged, edging only slightly higher. Concurrently, the average constituent stock return is up 6.7%, even as the broader S&P 500 Index is flat—pointing to a significant market-cap size effect.

Short interest changes are negatively correlated with market cap. As a result, smaller companies have seen a higher increase in short interest, while larger companies have experienced a decrease in short interest.

The prevailing trend shows that winning stocks have lower short positions while underperformers attract higher ones. This reflects a momentum strategy where traders are shorting into weakness and covering into strength.

For example, stocks linked to the AI narrative—like SanDisk (SNDK, +176% YTD), Western Digital (WDC, +75%), and Seagate (STX, +65%)—have seen short interest drop more than 1 percentage point as prices surged.

On the flip side, underperformers like Gartner (IT), Coinbase (COIN), and FactSet (FDS) are down over 30% with short interest rising steadily.

Notably, none of these currently qualify as having a high short squeeze score; they are orderly trend-following moves.

This relationship is even more pronounced in sector ETFs. Most notably, XLE is up 20% while its short interest % of float is down 4%. Conversely, the Technology sector (XLK) has short exposure is increasing (+1%) as the sector dips.

On the other hand, USO is up sharply as well (14%) but the short interest is up 9 percentage points — this is a reversal strategy.

The Oil equity investors and Energy investors are behaving differently on the way up, as commodity traders shorting, while equity investors are covering.

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