Investors who seek tohedge their portfolios by taking short
positions in certainstocks have felt a huge amount of pain in
recentquarters . As the S&P 500 is on track to post its
eighth straight monthlygain , the vast majority of stocks have
been pushed higher, which has fueled unnerving losses for short
Faced with the prospect of yet more losses, some short sellers
are simply throwing in the towel by covering their positions and
moving tocash . Data released May 9 showed that in just the last
two weeks of April, the short positions in
Microsoft (Nasdaq: MSFT)
Micron Technology (Nasdaq: MU)
Groupon (Nasdaq: GRPN)
Comcast (Nasdaq: CMCSA)
fell by more than 15%. That's a huge amount ofshort covering in
such a short amount of time.
Yet there remains a group of short sellers who refuse to budge.
Even after suffering considerable pain, they are keeping their
short positions in place -- or even building on them. Here's a
look at several stocks andfunds that are seeing notable increases
in short positions.
General Electric (
In the last two weeks of April, the short position in this Dow
component rose 14% to 94 millionshares . That's up from just 53
million shares held short at the end of 2012.
The move comes asanalysts slightly trim their growth forecasts
for GE in the face of a troubled globaleconomy . GE'ssales are
now expected to grow less than 2% in both 2013 and 2014,
according to consensus forecasts, though per-share profits are
expected to grow in the high single digits in each of those
Short sellers likely think itwill prove too difficult for GE's
profits to grow so much faster than sales. In fact, GE may start
to feel some seriousprofit pressures as the dollar's renewed
strength could reduce foreign-earned profits.
After staying in the range of 30 million to 40 million shares for
much of the pastyear , the short position in this energy giant
suddenly spiked 18% in the last two weeks of April, to 48
million. That increase came just a few days after the company
reported first-quarter results that showed a few cracks in the
As is the case with many global oil drillers, ExxonMobil's costs
are rising quickly because the company must dig deeper to find
productive pockets of oil and gas. The higher spending may
explain why the company has begun to trim its hefty share buyback
programs, from an expected $5 billion the first quarter to $4
billion in the current quarter.
Analysts at UBS take a dim view of thestock , citing Exxon's
"production profile continuing to fall short of expectations,
underlyingearnings seemingly increasingly reliant onasset sales,
and our belief that it will have to further reduce the pace of
share repurchases." These analysts alsonote steadily falling
per-share profits, from $8.29 in 2012 to less than $8 a share by
Short sellers may also be targeting energy plays like ExxonMobil
on concerns that oil prices are set to drop, as I recently noted.
That view may also explain the sudden large increase in an
energy-relatedexchange-traded fund (ETF) .
TheSPDR Select Fund-Energy (
saw a 36% jump in the short interest during the last two weeks of
April to 46.6 million shares.
Apple (Nasdaq: AAPL)
A few weeks ago, I noted that this tech giant announced a huge
stock buyback plan.
The buyback sure did the trick. Shares of Apple rose more than
10% in late April and still stand above $450.
Yet a slew of short sellers must think the buyback announcement
is a cover-up for a suddenly weakeningbusiness model . They've
hiked the short interest from 20 million shares in mid-April to
41.6 million shares by month's end -- a 107% increase in just two
Toput that in context, Apple's short interest had never exceeded
22 million shares in any prior reporting period. Even as Apple
was steadily falling from $700 to $400 over the past three
quarters, short sellers never chose to make Apple a big target.
Yet now, with shares alot closer to the52-week low than
the52-week high , short sellers are actually more emboldened than
Short sellers may be focusing on sales and profit growth for the
current quarter, which are again likely to be subpar before the
company embarks on a major revamp of its product lines later this
year. The risk for short sellers is that Apple makes a bold new
product announcement that freshly invigorates the stock, perhaps
aided by a
. That makes this a risky stock to short, but you need to track
the continuingbearish view on Apple, even if you arebullish .
Lastly, I want to revisit a bearish view on leading bank stocks.
Back in January, I noted that the short interest in the
Financial Select Sector SPDR (
had surged from 94 million shares at the end of November 2011 to
110 million shares a month later. That figure just spiked higher
again in late April, and now stands at 127 million shares.
ThisETF has risen 70% since the autumn of 2011, in part due to
expectations that a rebounding housing sector would lead to
higher levels ofmortgage underwriting .
On the flip side, theinvestment banking aspects of these
banks' business models are faced with stiff headwinds, from
greater regulation to a reduction in lucrative proprietary
trading operations. Short sellers are betting that investors are
unaware of the profit pressures playing out in the banking
industry and expect a reversal in this ETF.
Risks to Consider:
As long as themarket is moving yet higher,short selling can
be quite painful.
Action to Take -->
Though short selling has been unprofitable in recent quarters,
the market's steady advance is showing signs of fatigue; if the
market cools off, look for more vigorous trading action among
short sellers. That's why you need to track what these short
sellers are doing right now, as they may be providing early
warning signs of trouble ahead.
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