Stock Market

Hedge funds on the lookout: ‘they don’t want to get burned’, says analyst as GameStop-style short interest falls

The GameStop-style volatility around short-selling that reached a crescendo in the U.S. stock market in late January has declined markedly, according to recent data from S&P Global Market Intelligence.

The research firm’s data show that the share of outstanding stocks of S&P 500

constituent companies held by short sellers, or those betting that the company’s stock will fall in value over time, averaged 3.08%, down from 4.07% a year earlier.

In a report associated with S&P Global, Pauline Bell, an equity analyst at CFRA, said that in the aftermath of the short-squeeze drama in January, which was partly attributed to retail traders congregating on social-media platforms like Reddit and Discord to exchange trading ideas, hedge funds were steering clear of short bets.

“Hedge funds are on the lookout. They don’t want to get burned,” she was quoted as saying.

The S&P data showed that short interest in the consumer-discretionary sector
 the most shorted of the S&P 500’s 11 sectors in 2020, fell to 4.68% at the end of January, down from 5.41% in the middle of the month and from 6.68% at the end of January 2020.

Meanwhile, the healthcare sector

was the most shorted sector as of the end of last month, marking the first time that it has beaten out the consumer discretionary sector in over a year, the data show (see attached graphic).

via S&P Global | Market Intelligence

The data on short interest comes amid a public hearing on Thursday, which was being held in Washington by the House Financial Services System after an outcry against the online trading platform Robinhood and other brokers’ decisions last month to briefly restrict trading in “meme stocks.”

The House hearing also was intended to explore the rules and regulations that allowed shares of the videogame retailerGameStop Corp.

and cinema chain AMC Entertainment Holdings

to soar in value, powered by an army of bullish amateur traders, causing ripples throughout the financial markets.

The trading activity, which hit its peak in late January, helped to briefly unsettle trading activity in the broader stock market, with the Dow Jones Industrial Average
the S&P 500 index

and the Nasdaq Composite Index

lurching lower and booking the worst weekly losses since October before finding its footing higher again.

As the data show, the market has come back to Earth. AMC Entertainment, however, remains one of the most heavily shorted stocks on Wall Street, but the share of its float being shorted is back to more normal proportions after many of companies targeted by short betters weeks ago were seeing short interest far exceed their total shares outstanding.

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