Short-sellers scale back bets against consumer discretionary stocks amid rebound

Short sellers backed off consumer discretionary stocks last month after having piled up their bets against the hard-hit sector.

According to data from S&P Global Market Intelligence, short interest in consumer discretionary stocks tracked by the S&P 500 fell 1 basis point from the end of April through the middle of May to settle at 5.43%.

This modest slip marked the first time since November that short bets on companies in the category — which tracks sellers of items that are non-essential to consumers but desirable if they have the spending power — had declined.

The group has been the S&P 500's worst-performing basket of names this year, with consumer discretionary stocks falling as much as 35% from November 2021 high before a recent comeback.

During last Friday's rally, the S&P 500 Consumer Discretionary Index led gains in the broader benchmark index, rising more than 9% to mark its best day since April 2020.

Still, consumer discretionary stocks remained the most-shorted area of the S&P 500, according to S&P Global. By comparison, short interest in the S&P 500 overall was at 2.19% as of May 25, up 5 basis points from the end of April.

“While the S&P 500 Index has not officially entered bear market territory, plenty of areas of the market have,” LPL Equity Strategist Jeffrey Buchbinder said in a recent note to clients. “The consumer discretionary sector is one of them, and as we heard from some of the biggest retailers during earnings season, the outlook is only getting tougher as energy prices soar and supply chain problems persist.”

MIAMI, FLORIDA - MAY 18: People visit a Target store on May 18, 2022 in Miami, Florida. The retail store reported a 52% drop in profit for the first quarter, missing Wall Street's forecasts. The company blamed higher expenses due to continued supply chain disruptions as well as the high inflation rate. (Photo by Joe Raedle/Getty Images) (Joe Raedle via Getty Images)

Bets against the consumer have been on the rise

Short interest in consumer discretionary stocks has been on a steady rise since late last year, rising from 3.77% in October 2021 to north of 5% by the spring of this year, as sellers bet soaring inflation would weigh on demand for nonessential goods and services.

At the end of April, short interest in the sector hit its highest point since December 2020.

Citi Trends Inc. (CTRN) was the most-shorted stock in the sector as of mid-May with 39.4% short interest, per S&P Global's data. Camping World Holdings (CWH), Big 5 Sporting Goods (BGFV), and Beyond Meat (BYND) were also among consumer discretionary names with the highest short interest.

Average short interest over shares outstanding at mid-May by sector. (S&P Global Market Intelligence)

Investors raised their bets against the sector as concerns mounted that 40-year-high inflation could prompt U.S. consumers to reduce purchases of discretionary goods. A slowdown in home sales also placed downward pressure on stocks in the group, with fewer purchases of new items for the home.

Recent results from consumer bellwethers Walmart (WMT), Target (TGT), and Kohl's (KSS) showed weaker profit forecasts amid bloated inventories and rising costs, stoking worries about the outlook for consumer-focused peers.

Some more upbeat earnings from the sector, however, helped pare losses.

Retailers including Macy's (M), Nordstrom (JWN), Dollar General (DG), and Dollar Tree (DLTR) exceeded Wall Street's estimates, helping mitigate concerns that the profit pressures reported by Walmart and others were would be felt more broadly among consumer-facing firms. And outside of retail, airlines including JetBlue (JBLU) and Southwest (LUV) raised their guidance for the current quarter, suggesting demand remained strong for discretionary travel.

Short sellers, big profits

Overall, however, the downturn in equity markets has made 2022 a lucrative year for short sellers.

Through May 16, short-sellers had raked in $215.6 billion year-to-date in mark-to-market profits, a 23.87% return on an average short interest of $903 billion, per a report from investment data firm S3 Partners.

As markets approached their lows of the year in late April and early May, S3 data shows that some $144.1 billion of these year-to-date profits were realized during the 30-day period ending May 16.

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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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