The volatility in the stock market rose in September, resulting in short sellers selling $19 billion of new shorts in eight trading days during the second half of the month.
The Dow ended with a nearly 500-point drop on Sept. 23, a decline of 4% and below the 30,000 mark as recession concerns rose with the Federal Reserve continuing its hawkish stance.
Equities extended declines into a fourth consecutive session while stocks globally dipped to the lowest levels in two years. Investors have been retreating with the U.S. central bank's tightening stance as global growth slumps.
Stocks were impacted also by the spillover impact of Britain's first budget under new Prime Minister Liz Truss, which includes an extra $80 billion in borrowing to pay for tax cuts and energy prices caps for the fifth-largest economy.
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Short Sellers Reverse Direction
Short sellers have reversed direction recently and sold $19 billion of new shorts from Sept. 12 to Sept. 21. Earlier in the month, shorts bought to cover $16 billion of their short positions from Aug. 31 to Sept. 12, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, a New York-based financial data company.
The rally earlier in September has been replaced by a large correction. Short interest globally was $1.37 trillion on Aug. 31 and increased to $1.4 trillion with mark-to-market increases and offsetting short covering.
Short interest reached $1.31 trillion as of Sept. 21 with mark-to-market decreases and offsetting short selling, he wrote in a report.
The amount of short interest globally fell to $63 billion in September with most sub-industries or 81% of the 159 sub-industries reporting declines in short interest.
The data showed that 58% of all sub-industries had net short selling and 42% had net short covering while 96% of all sub-industries had a decline in the mark-to-market value of their shorted shares, Dusaniwsky said.
"Like using a boat’s fish finder to locate schools of large fish, we can use the S3 Black App to look for profitable sub-industries on the short-side that are seeing increased short selling — winning trades where traders are increasing their bets," he said.
The volume of short selling was highest in steel, reaching $13.29 billion. The stocks that were shorted the most were Vale (VALE), Fortescue Metals Group (FSUGY) , Nippon Steel (NPSCY) and ArcelorMittal SA (MT).
Investors Shorting Certain Industries
Stocks were also heavily shorted in the marine, forest products, heavy electrical equipment, mortgage REITs, textile industries, wireless telecom and aluminum, among others.
"We are looking for sub-industries with increased net short selling, September short -side returns over +10% and short selling replacing at minimum 40% of the mark-to-market decline of the value of shares shorted," he said. "Like a good craps player, we are looking for a hot table where betters are backing up their bets. There are 16 sub-industries that meet these metrics. Meanwhile, there are 73 sub-industries with increased net short selling and +10% September profitability, but the dollar value of the new short selling was a small portion of the mark-to-market declines of their shares shorted."
There were several sub-industries that showed $250 million of increased short selling in September, including internet and direct marketing retail, systems software, semiconductor equipment and construction machinery and heavy trucks.
