2023's Wild Ride: Short Sellers Take A $195 Billion Hit In US And Canadian Markets

The U.S. stock market rallied in 2023 despite the Federal Reserve's aggressive stance and concerns regarding an impending recession and growing geopolitical tensions. The tech-focused Nasdaq Composite index surged by over 43% in fiscal 2023, marking its best year since 2020. The broader S&P 500 index rose 24.2% last year, while the Dow Jones Industrial Average gained nearly 14%. The Canadian S&P/TSX Exchange rose by nearly 8% last year.

The U.S. and Canadian equity markets' stellar performance, despite all odds, proved to be highly unprofitable for short sellers, who were betting on stocks to fall. According to S3 Partners Research, short sellers faced an "exceedingly difficult year" in 2023, losing approximately $194.9 billion. Bearish traders had a total short position of $957 billion in 2023, according to S3 Partners.

Banking Crisis

The U.S. regional banking crisis in early 2023, triggered by the collapse of Silicon Valley Bank, was one of the most profitable periods for short sellers. Short sellers booked a profit of 840%, or $1.6 billion, on their bet against First Republic Bank, making it the most profitable bet placed by short sellers last.

The collapse of First Republic Bank marked the largest banking failure since 2008 and the second-largest in history. The bank was subsequently acquired by JPMorgan Chase & Co. (NYSE:JPM). Short interest increased tremendously during the height of the banking crisis, as short interest in First Republic increased to the range of between 7% and 37% by March 31, significantly above the average of between 3% and 5% for U.S. equities.

Silicon Valley Bank (SVB) was the second-most profitable investment bet made by short-sellers last year, while Signature Bank was the 11th most profitable.

“The shorts in the months before the collapse were accurately warning the markets...that the bank (SVB) was being dangerously mismanaged,” Better Markets President and CEO Dennis Kelleher wrote in an email to Reuters. “The problem is once that collapse happened, shorts with various motives started targeting other banks.”

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Tech Rally Of 2023

Tech stocks, which witnessed a substantial rout in 2022, made a surprising comeback last year, catching short sellers off guard. Artificial intelligence (AI) was the game changer driving tech stocks last year, as Microsoft Corp.-backed OpenAI launched the viral generative AI platform ChatGPT, while chip maker Nvidia Corp.'s AI-focused chips gained traction.

The six major stocks that faced setbacks for short sellers, according to S3 Research Partners, include Tesla Inc., Nvidia, Apple Inc., Meta Platforms Inc., Microsoft and Amazon.com Inc.

Short sellers lost the most money betting against Tesla, booking a collective loss of $12.2 billion in 2023. Short sellers lost more money on their Tesla bet than any other company last year, as the stock surged by nearly 102%. This is in stark contrast with 2022 when short sellers booked a net profit of over $15 billion as Tesla slumped by approximately 65% in fiscal 2022.

Trends In 2024

So far, 2024 has been tumultuous for the U.S. stock market, as equities have been fluctuating because of concerns regarding the timeline of interest rate cuts that the Federal Reserve signaled in December.

However, the benchmark indexes have ended in the green as of Jan. 27, with the S&P 500 index gaining over 2.5% year to date. The Nasdaq Composite index, on the other hand, has fared slightly better so far this year and is up nearly 3%. The DJIA index logged 1.1% gains over the same period.

The Magnificent Seven stocks plummeted during the first trading week of 2024, driving bearish short sellers to book nearly $4 billion in gains as of Jan. 10.

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