There Are No Short Sellers Left

Short sellers protect the market which sounds weird because many blame them for weakness. The reality is shorts mainly go after weak companies that have fundamental flaws. It’s not the messenger’s fault the flaws exist. Of course, some short on valuation, but those are trades that don’t get talked about as much. The ones that are discussed are the ones that cause stocks to crater. It’s healthier if the flaws are pointed out earlier by shorts rather than later when the problem becomes enormous. Obviously, shorts are trying to make a profit, but calling out bad practices makes a market healthier just like a controlled forest fire makes the forest healthier even though it is a painful process.

Also, when stocks fall, short-sellers cover their shorts which creates a cushion for the market. It’s like how investors take profits on the long side, except shorts are usually quicker to cover because shorting should usually be a short term trade since there are borrowing costs. You don’t want to be caught shorting a stock for months hoping something bad happens. In theory, you want a catalyst.

There is nothing wrong with holding a stock for years while long. That’s the best description of this market which is why shorts are an endangered species. As you can see from the chart above, the median short interest of S&P 500 stocks is the lowest since at least 2004. There are still plenty of smaller companies not in this index that are shorted heavily, but this has been a painful 6 month run for the shorts.

Another Bubble

Some have claimed we are in a new paradigm where low rates sprout mini bubbles such as in blockchain and marijuana stocks. The fracking stocks in the mid-2010s weren’t as popular with retail traders, but their businesses certainly were helped by low rates. One of the problems for frackers is by being successful, they led to their demise because more oil supply leads to lower prices.

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