Not Even the Short Sellers Saw the Banking Panic Coming -- Barrons.com

Dow Jones2023-03-24

By Teresa Rivas

Today is World Bear Day, and while we have every reason to celebrate our ursine neighbors, bearish investors are likely feeling less than festive. Data show they were almost entirely blindsided by the banking sector turmoil, making for some grisly charts.

Over the past month, the banking sector has taken a beating, with the Financial Select Sector SPDR Fund $(XLF)$ down 12% and the SPDR S&P Bank ETF $(KBE)$ off 27%. The collapse of Silvergate Bank, Silicon Valley Bank and Signature Bank triggered widespread panic about the financial industry. Both regulators and Wall Street worried that liquidity issues -- sparked by nervous investors pulling their deposits -- could spread to other players and the broader economy.

In fact, an analysis by S&P Global Market Intelligence shows financials had the least short positions of any sector at the end of February. That might come as a surprise, as short sellers are on the lookout for corporations and industries that look vulnerable. A short position is when an investor sells borrowed shares of companies whose stocks they believe are ripe for a fall, in the hopes they can buy them back more cheaply later for a tidy profit.

The short interest -- the percentage of short positions among shares available for trading -- in financials on all major U.S. exchanges stood at just 1.4% at the end of February. That was well below short interest of 2.4% for materials, the next least hated sector.

By contrast, average short interest in the consumer discretionary sector was a whopping 5.7%. Short interest for the S&P 500 as a whole stood at 2.3%.

Moreover, that 1.4% was 0.1 percentage point lower than where short interest stood for the financial sector at the end of 2022 . That means even fewer investors were skeptical of such stocks last month than they were at the start of the year.

It gets worse when you drill down into individual stocks. According to S&P Global's data, Silicon Valley Bank parent SVB Financial (ticker: SIVB) had short interest of 5.4% at the end of February; that's above the average for sure, but a decline from 6.9% in mid-January. Likewise, short interest in now defunct Signature Bank $(SBNY)$ fell to 6.1% by February's end, down from 6.4% in mid-January. The shares of both companies were halted earlier this month after suffering major losses.

That said, bears did get one right. Silvergate Capital (SI), which announced plans to liquidate Silvergate Bank on March 8, was one of the five most-shorted stocks at the end of February. (It was joined by Bed Bath & Beyond $(BBBY)$, Grom Social Enterprises $(GROM)$, Carvana $(CVNA)$, and Novavax $(NVAX)$.) Silvergate stock was also halted after losing nearly all its value.

Still it isn't entirely surprising that short sellers missed the boat. After a painful 2022, the market rebounded rapidly to start the year, the economic debate appeared to veer from hard versus soft landing to no landing as interest rate hikes kept coming, and riskier bets like tech were once again in vogue. In short, not as many people were looking for the next shoe to drop in early 2023, as there were during the stock market's 2022 selloffs.

Nonetheless, despite the banking pain that has dominated markets recently, both the S&P 500 and Nasdaq Composite have held on to their year-to-date gains, and are in the black for 2023. Both of those indexes, along with the Dow Jones Industrial Average, have climbed over the past week's trading.

Perhaps then, March will be the cruelest month this year faces. But bears still shouldn't sleep on the potential for more turmoil.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

 

(END) Dow Jones Newswires

March 23, 2023 14:02 ET (18:02 GMT)

Copyright (c) 2023 Dow Jones & Company, Inc.

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