Short Sellers have been active in 2023 even though the S&P 500 and Russell 3000 indexes were up +24% and Nasdaq index was up +43%. Total short interest increased by $221 billion, to $1.08 trillion in 2023. The sectors with the largest increase in short interest were Information Technology (+$75 billion) and Consumer Discretionary (+$46 billion). Only the Miscellaneous (SPAC) sector saw a decrease in short interest (-$0.2 billion).

Change in short interest has two components, the change in the number of shorted shares and the change in the stock’s price. The $220.8 billion change in total short interest was made up of a $57.2 billion increase in the total amount of shares shorted coupled with a $163.6 billion increase in the stock price of the shares shorted. Short sellers were increasing their short exposure to the market even though stock prices were rising, and they were incurring mark-to-market losses.

In 2023, short interest increased in virtually all of the sectors, but we saw investors ramp up their exposure in the Information Technology (+$75.2 billion) and Consumer Discretionary (+$46.3 billion) sectors the most. But most of the increase in short exposure in these two sectors was not due to increased short selling but rather a mark-to-market increase in the shares they had already shorted. Short sellers were not reducing their exposure in these shorted stocks that were producing negative returns, they were not trimming their overall positions even though there was short squeeze pressure in many of their stocks. Depending on the stock, their conviction was high that the shares were over-bought and priced too high, or the stock was a significant part of a portfolio hedging or risk mitigation strategy.

Ten out of the top twenty stocks that had the largest increases in short interest were in the Consumer Discretionary or Information Technology sectors:

Stocks with the largest decrease in short interest in 2023 were more mixed but six of the top twenty stocks with the largest decrease in short interest were in the Financial sector:

While increases and decreases in short interest tell us where investors are increasing or decreasing their short exposure, changes in shares shorted shows us investor activity that actually hits the trading tape and moves stock prices.

We saw $57.2 billion of increased short selling in 2023 with the largest increase of short selling occurring in the Health Care (+$20.9 billion) and Energy (+$8.4 billion) sectors while we saw slight short covering in the Financials (-$0.2 billion) and Miscellaneous-SPAC (-$0.08 billion) sectors.

Once again Information Technology and Consumer Discretionary stocks dominated the league tables with nine of the top twenty most shorted stocks in 2023:

And Information Technology and Consumer Discretionary stocks also led in the most bought-to-cover stocks in 2023, holding eleven of the top twenty spots:

There are two main reasons for the increase in short interest in 2023. The 2023 rally produced over-bought and over-priced stocks in which short sellers are looking for a pull back and with many hedge funds under-exposed to the market in the earlier part of the year they began leveraging up both their long and short books in order to gain more market exposure and boost full-year returns.

But we also see that there still remains a herd mentality in the short side of the market. 78% of the dollars shorted saw an increase in short interest, but this was only in 37% of the stocks that have been shorted. And while 62% of all dollars shorted saw an increase in short selling, the short selling occurred in only 39% of the shorted stocks.

Active short selling is occurring in just over a third of the shorted stocks in the market, which means that price movement and volatility due to short selling and short covering is concentrated in a smaller group of securities. Knowing which sectors and which stocks have this concentration can provide insight into portfolio construction and risk management. Which in turn, can help produce outsized returns if the short side volatility is identified and traded appropriately.

Our Blacklight SaaS platform and Black App provides an up-to-date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions. The Black MaP and Black App products provide a total view of long and short positioning in the market with a breakdown between Active\Passive long investors, 24 Fund type entities, over 50k securities globally across 108 countries and data from 58 regulatory exchanges.