Thanks to a stellar November, the S&P 500 is within 250 points of its all-time high from almost two years ago. But to some investors, this is reason to be bearish.
Since the fall season began, there has been an increasing number of short positions being taken in U.S. stocks. A term commonly used to describe the extent to which the market is betting against equities is short interest.
Short interest data centers around company shares that have been sold short and not yet repurchased. It is often viewed as an indicator of investor pessimism in a particular stock or index.
According to Chicago Mercantile Exchange (CME) data, S&P 500 short interest is up 20% since September 19th. This shows that while some are enjoying a spirited bull run into the winter holidays, others are bracing for a downturn. Despite optimism around an end to Federal Reserve rate hikes, a growing number of market participants appear to think we aren’t out of the woods just yet.
Before we dive into some of the stocks with rising short interest, let’s highlight some of the key data points we’ll be referencing.
- Shares short - This is simply the number of shares held short. Investors who short a stock are anticipating that its price will go down. If it does, they’ll buy the stock at a lower price to ‘pay back’ the market for the shares it borrowed to sell. The difference between short price and long price is the profit (or loss).
- Dollar volume sold short - The dollar value of the total number of shorted shares.
- Short percent of float - This is the number of short shares divided by floating shares. Floating shares are those that are publicly owned, unrestricted and available for purchase or sale. They differ from outstanding shares, which include those held by corporate insiders.
- Short interest ratio- Also called ‘days to cover,’ this is the number of short shares divided by the stock’s average 30-day volume. It tells you how many days it would take to repurchase the short shares, given the stock’s typical trading volume. Generally speaking, a stock with a higher short interest ratio has a greater potential for an extended short squeeze event.
This brings us to a ‘short squeeze’ — often what attracts bullish investors to well-shorted stocks. A short squeeze happens when a stock with many short sellers goes up unexpectedly. The uptrend is then accelerated when short sellers start buying to cut their losses. GameStop and AMC Entertainment are two epic recent examples.
High short interest isn’t common within the S&P 500. Approximately 9 out of 10 constituents have less than 5% of their float held short. Only one, SolarEdge Technologies, is currently above 15%. Due to the ‘blue chip’ nature of the index, most investors are reluctant to bet against S&P 500 names.
Some do, however, have relatively high short interest. For investors looking to hop on the bearish bandwagon or exit existing holdings, this data point is usually sufficient.
But for those in search of the elusive short squeeze, it is only half of the equation. Companies with high and rising short interest can be ideal. Catching confident bears off guard can leave them running for the hills.
It makes these three S&P 500 stocks ones to watch as possible sell — or short squeeze — candidates in 2024.
Why is Etsy’s short interest rising?
On November 1st, Etsy, Inc. (NASDAQ: ETSY) handily beat consensus third quarter financial estimates thanks to growth in both marketplace and services revenue. The stock jumped in high volume and hasn’t looked back since. Bears are seeing it as an opportunity to sell short.
Short interest on ETSY has risen to 14.6 million shares, or $1.05 billion. More than 12% of the float is held short, making the stock one of the least liked in the S&P 500. At the end of August 2023, the short float was only 7%. This suggests that some feel the Q3 outperformance was a fluke — and that ETSY will continue to trend lower from the pandemic-driven $300’s.
Note: short interest data is updated twice per month. The most recent data available is as of November 15th.
Does NCLH have good short squeeze potential?
Norwegian Cruise Line Holdings Ltd. (NYSE: NCLH) has several markings of a good short squeeze candidate. Short interest is up to 55.17 million shares, which equates to 13% of the float. Both are up sharply over the last three months. Plus, NCLH is a low-priced stock that became popular as a reopening play and has remained a frequent topic of conversation in social media groups.
On the heels of a better-than-expected Q3 report, the stock is on an 8-day winning streak. A rising share price and rising short interest could create a perfect short squeeze storm. Cruise line peer Carnival is in a similar boat.
What is the short interest on Tractor Supply?
As of November 15th, short interest in Tractor Supply Company (NASDAQ: TSCO) was 11.33 million shares, this is down 3% from October 31st but way above where short interest was at the start of 2023 — 3.31 million shares.
With the short interest ratio up to 9.4 days (compared to 3.5 to start the year), investors are increasingly betting that the retailer will face another difficult year in 2024. Management recently lowered its full-year outlook after posting lower-than-expected Q3 sales, citing “discerning” customer spending.
Short sellers are putting TSCO out to pasture despite not a single Wall Street analyst calling the stock a sell. More than 10% of the float is held short. It is a risky stock to bet against, considering Tractor Supply has plowed ahead 23.2% annually over the last 15 years.