Author:
Ihor DusaniwskyThe majority of U.S. stocks rarely see fierce battles between long holders and short sellers, given that long shareholders outnumber short sellers by a margin exceeding forty to one. Although most stocks have relatively insignificant short selling relative to their long holdings, there are stocks where short sellers do have an impact on price moves; these are the battleground stocks.
One of the most important factors to consider is that daily price moves are determined by imbalances of buying or selling pressure in a particular stock. When either the Bid or Offer side becomes saturated with orders, stock prices are inevitably pushed in the corresponding direction. Not all of the $60+ trillion long shareholders actively trade their shares; in fact, the vast majority of long shareholders are passive investors who buy shares and hold onto them for long periods of time. These shareholders include mutual funds, index funds, ETF providers, pension funds, and most retail investors.
Hedge funds and other active market participants routinely execute long-short strategies, continuously entering new positions, exiting existing ones, or fine-tuning their exposure by scaling holdings up or down on any given day. Active investors, such as hedge funds, are also the primary short sellers in the market.
Therefore, in order to truly see which stocks are highly volatile stocks due to potential long or short squeezes in battleground stocks or which are skewed heavily to the long or short side in actively traded portfolios, we need to identify the amount of stock held long by passive versus active investors. Using S3’s MAP and Disclosure products, we see that total disclosed long holdings are over $55 trillion (not all long holdings are disclosed), which is split between passive shareholders and active shareholders. Passive investors command roughly three-fourths of all U.S. share ownership, leaving just one-fourth distributed across actively managed portfolios.
Using S3’s Black App, we also see that total U.S. regulatory reported short interest is almost $2.0 trillion, which is primarily held in actively traded portfolios. With active long positions surpassing active short positions at a ratio of 8.5 to 1, the market's active landscape remains decidedly tilted toward the long side.
We can break the U.S. market into two groups: mega and large-cap stocks, which are traded by the larger, more multi-strat hedge funds, and the mid and small-cap stocks, which are mainly traded by the “smaller” long-short hedge funds.
Mega & large stocks in “active” portfolios predominantly skew long and there are only five stocks skewing to the short side. There are relatively few battleground stocks in the mega and large-cap space because many of these names heavily skew long, serving as core portfolio holdings designed to drive overall market performance (MSFT, AAPL, AMZN, META, GOOGL, etc.). But there are a handful of stocks where both long shareholders and short sellers are going toe-to-toe.
The mid- and small-cap segments level the playing field considerably, as the largest hedge funds tend to steer clear of these names, allowing long holders and short sellers to compete on more equal footing. Most mid and small-cap stocks that skew to the long side may have significant hedge fund short selling, but the hedge fund long buying still overwhelms the short side. There are more mid- and small-cap stocks skewed to the short side compared to mega- and large-cap equities, as active long investors have a broader universe of stocks to choose from and are often less involved in heavily shorted names.
And there are many more battleground stocks to pick from in the mid- and small-cap space. Many mid and small-cap stocks are championed by long shareholders in one hedge fund versus being heavily shorted stock in another hedge fund. We then see sizable wagers on both sides, and changes in long or short exposure can have a significant impact on daily price moves.
S3’s MAP and regulatory disclosure products provide visibility into the long side of the market by tracking passive and active shareholdings. The S3 Black App and short-side data product quantify the “other” side of the portfolio, short-selling activity.
Using both products identifies which securities have outsized passive long shareholding and, therefore, have less market volatility versus stocks that have a larger amount of active long and/or active short shareholders. Stocks with a larger concentration of active holders tend to experience greater volatility and, perhaps more importantly, higher Gamma, meaning a faster acceleration in price movement changes. Stocks dominated by passive holders tend to move in steady, predictable rhythms, occasionally turbulent but rarely extreme, whereas actively held stocks can escalate from calm to catastrophic in a matter of moments.
Long skewed stocks can have long squeezes, short skewed stocks can have short squeezes, but battleground stocks are more highly volatile stocks because they can have both long and short squeezes. Traders can take advantage of these more volatile stocks by buying leveraged volatility through derivative strategies or selling that high-priced volatility if they have a long or short preference in the security.
Traders can also take momentum positions in these battleground stocks as they begin their volatile move upwards or downwards and ride the potentially outsized wave to garner excess returns. Battleground stocks that fit this profile were stocks such as SIRI, MRNA, MSTR, JBLU, AMC, KSS, and HIMS.
But the potential outsized returns do not come without potential outsized risks. Finding yourself on the losing side of a battleground stock can trigger violent short or long squeezes, driven by rapid and severe mark-to-market deterioration. Once a portfolio holding is identified as a battleground stock, it is imperative to heighten its risk management profile. Using S3’s short and long data identifies these battleground stocks and helps hedge funds and traders take advantage of these opportunities and protect themselves from potential trading hazards.
Want to know more? Access this data in real time using S3’s BLACK APP & BLACK MAP