It appears that Wall Street short sellers have turned gun-shy in the wake of the GameStop saga, which cost market bears billions of dollars in losses.
In fact, there’s been a notable drop in the short interest of S&P 500 companies since the retail trader-fueled short squeeze of GameStop and other “meme stock” companies sent the market into a tizzy last month. According to S&P Global Market Intelligence data, the percentage of outstanding shares of S&P 500 constituent companies held by short sellers averaged just under 3.1% at the end of January—down a full percentage point from nearly 4.1% one year earlier.
The data indicates that many Wall Street shorts are now once bitten, twice shy, and with good reason. The GameStop fiasco cost institutional short sellers tens of billions of dollars, with legendary hedge funders Steve Cohen and Dan Sundheim among those to have felt the squeeze.
The S&P’s consumer discretionary sector has seen the sharpest decline in short interest; after being the most shorted of the benchmark index’s 11 sectors in 2020 amid pandemic-related headwinds, consumer discretionary short interest fell to just under 4.7% at the end of January—down two percentage points from 6.7% at the end of January 2020. Health care took the mantle as the S&P’s most shorted sector at the end of last month, but even those stocks saw a decline in their short interest, which fell to 4.8% from 5.6% a year earlier.
As would be expected, shorts have also retreated from many of the “meme stocks” at the center of the great short squeeze of 2021. GameStop’s short interest had fallen from 132% of its float as of Feb. 8 to only 46% by Feb. 16, according to analysis by CFRA Research cited by S&P Global Intelligence. Likewise, home goods retailer Bed Bath & Beyond saw its short interest fall from 69% to 29% in that same span, with similar declines for soft drink maker National Beverage (83% to 46%) and department store chain Dillard’s (72% to 38%).
The pullback is likely to linger for some time given the steep price that hedge funds and other bears paid for their bad bets, as well as the heightened scrutiny that shorts now face from opportunistic retail investors on Reddit and other online forums.
“Given recent events, it makes sense—as well as sensible risk management—[for short sellers] to pare back risk at a time when the focus has been on overexposure with respect to positioning,” CMC Markets chief market analyst Michael Hewson told S&P Global Market Intelligence.
There’s also more intense regulatory spotlight to account for—as evidenced by this week’s much-hyped congressional hearing on the GameStop saga, which featured testimony from hedge funders like Citadel’s Ken Griffin and Melvin Capital’s Gabe Plotkin, as well as Reddit retail trader Keith Gill, a.k.a. “Roaring Kitty.”