• S&P 500 short interest as % of market cap at 15-year low
  • Energy lone sector with above average short interest
  • Short sellers targeting fixed income ETFs on yield curve prediction

The median S&P 500 stock short interest as percentage of market capitalization at the start of August was 1.8%, according to Goldman Sachs. Against the backdrop of a seemingly unstoppable stock market, this reading has reached its lowest point since the brokerage began tracking the data in 2004. It is down from 2% at the start of year, and far below the 15-year average of 2.4%. The only sector seeing above average short interest is Energy.

short interest
Source: Goldman Sachs.

Since the COVID plunge in March, shorts have seen mark-to-market losses of $383.5 billion, according to S3 Partners . At the start of August, they were down $27.2 billion for 2020, with July pulling a previously overall profitable year into the red.

Goldman Sachs
Source: Goldman Sachs.

However, the financial technology and analytics firm recently spotted a marked increase in fixed income short selling despite the specter of the Fed purchasing ETFs in future rounds of easing. Five out of the top 10 most shorted ETFs over the last week were Bond ETFs. Short interest in these five ETFs (LQD, IEF, TLT, HYG, AGG) increased by 10% last week. "Bond ETF short sellers may be thinking that the yield curve has bottomed out in the short term and may be trending higher causing the prices of the ETFs bond holdings to decline," said the note.

Short sellers have also added $1.6 billion of new short positions in SPY, which tracks the S&P 500 index, while buying-to-cover $841 million of IWM (tracks the Russell 2000) and QQQ (tracks the Nasdaq 100 index). "This action implies investor’s belief that there will be near term underperformance in the core S&P 500 names (up +5% YTD) while tech will continue its momentum march (up +26% YTD) and the broader market that has lagged behind (down -7% YTD) will begin catching up to the rest of the market," wrote analyst Ihor Dusaniwsky.