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Traders betting against stocks made a killing in 2022 as short sellers netted $300 billion

Traders on the floor of the NYSE, June 24, 2022.

Source: NYSE

Traders who shorted stocks won big in 2022, according to S3 Partners.

Shorted stocks had a 30.8% return in 2022, said Ihor Dusaniwsky, the company’s managing director of predictive analytics. That means short sellers fared better than the broader market, which suffered its biggest losses since 2008. Dow Jones Industrial Average, S&P 500 and Nasdaq Composite lost 8.8%, 19.4% and 33.1% respectively last year.

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Traders betting against stocks made a killing in 2022 as short sellers netted 0 billion


U.S. short sellers had $300 billion in market profits on average short interest of $973 billion, Dusaniwsky wrote.

But even with the huge gain in 2022, short sellers still lag behind in recent history. Over the past five years, the average annual return for short sellers was a loss of 4.4%, while the Dow gained 6.8%, the S&P 500 rose 9.3% and the Nasdaq rose 12.5%.

How short stocks have performed over the past 5 years

Dow return (%) S&P 500 return (%) Nasdaq return (%) Short return (%)
2018 -5.6 -6.2 -4.7 8.9
2019 22.3 28.9 35.2 -22.1
2020 7.3 16.3 43.6 -27.1
2021 18.7 26.9 21.4 -12.6
2022 – 8.9 – 19.4 -33.1 30.8
5-year average 6.8 9.3 12.5 -4.4

Source: S3 Research

When an investor sells a stock “short” they borrow shares from a broker and sell them in hopes of buying back the stock later at a lower price. It’s a tactic that works best when the broader market is hurt. Short-selling returns underperformed the major indexes as the market gained value in 2019 to 2021, but beat the averages as they ended the year down in 2018.

It is worth noting that the total amount shorted last year was below 2021, when the $1 trillion threshold was breached, but higher than in 2018 to 2020.

Short sellers still needed to be good stock pickers in 2022, as different sectors and individual holdings could produce very different results, Dusaniwsky said.

For example, the top sector shorted last year was beaten down communications services stocks, which produced a return on shorted holdings of 56.7%. Energy was the worst, posting a 28% loss on shorted holdings, S3 Partners said.

Short-term and long-term performance are usually reversed. That’s because investors typically short stocks that they expect to lose value, so energy — which was the only S&P 500 sector gainer in 2022 — wouldn’t be a target for shorting as investors saw stock values ​​rise despite the broader market’s decline .

And choosing a sector orientation is “only half the battle” given the variety of stocks within each. In consumer goods, for example, Beyond Meat had the highest return on short selling with 128.2%. French fries manufacturer Lamb Weston was the least profitable in its sector, losing 43.9%.

caravanwhich was hammered as demand for used cars fell, had the best short performance of all stocks with at least $100 million in short interest, posting a 377.6% gain.

On the other side, Madrigal Pharma was worst at short. Bets against the company lost 345.4%. The share rose in December on the back of well-received data from drug trials.

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