Short sellers lost billions of dollars in the second quarter betting against some of the market's biggest, most popular stocks including Nvidia, Apple, and Tesla. The recent performance of all three shares raises the question, why would they do that?
Short sellers lost $2 billion betting against Tesla stock in the second quarter, according to data aggregated by short-selling research firm S3 partners.
Short sellers borrow stock they don't own and sell it, betting they can buy shares later at a lower price. Short interest is generally the amount of stock sold short versus the total amount available for trading.
The average short interest for a component stock of the S&P 500 is a little less than 3%, according to FactSet.
Short selling was on the rise in the second quarter. "Short interest in the U.S./Canada markets increased by $57.9 billion, or 5.1%, to $1.2 trillion in the second quarter of 2024," wrote Ihor Dusaniwsky, managing director at short-selling researcher S3 Partners, in a Monday report.
About 84% of the increase was concentrated in the tech sector. That wasn't such a good move. The three least-profitable short positions in the second quarter were Nvidia, Apple, and Tesla. Short sellers lost almost $16 billion on that trio, according to S3.
Nvidia stock gained 37% in the second quarter. Apple stock was up 23%, and Tesla shares gained 13% while the S&P 500 rose 4%.
Of the three, Tesla has the highest short interest at almost 4% of available shares. That's higher than average, and investors can understand why.
Coming into the second quarter, Tesla shares were down almost 30% as slowing sales growth weighed on investor sentiment. But things started to turn around after Tesla won the ability to sell its driver-assistance products in China, and after shareholders approved Elon Musk's 2018 pay package. Things didn't turn out as badly as expected for the electric-vehicle giant.
Short interest in Apple and Nvidia is less than half of the average short interest for an S&P 500 stock. That's a sign that no one is betting aggressively against those two companies.
Sometimes short selling represents a hedge. There are any number of reasons to hedge a portfolio. Investors might feel nervous about the market but don't want to sell positions. Or investors might see more upside in other tech stocks besides Apple and Nvidia. Selling similar stocks short in similar sectors can isolate potential returns from what one company is doing on its own. That's the idea, anyway.
Or investors might be actively writing options contracts. An option essentially gives the holder the right to buy or sell a stock at a fixed price in the future. An unhedged option can create the risk of a big loss for the seller. They could be forced to buy or sell a stock in the future at who knows what price. Hedging positions can eliminate that risk, leaving the options seller making a spread only on the initial transaction.
Whatever the reason, things didn't go well for tech short sellers in the second quarter. Overall, short sellers did OK in the second quarter, making about $10 billion, according to S3. The losses in bearish bets on big tech were exceeded by gains made short selling health care, industrial, material, and energy stocks.
Investors should keep in mind that there is a lot more money to be made owning stocks now than betting against them. The S&P 500 index gained about $2 trillion in the second quarter, dwarfing the $10 million short sellers made in that period.