Short Sellers May Lift the Market as They Try to Protect Gains

(Bloomberg) -- It is fair to say that short sellers have won this round. These investors, who typically bet on the price of an equity or asset going down, have made a killing amid the broader selloff that has roiled U.S. financial markets for the past month.

The time has now come to protect those profits before stocks start potentially rebounding. On Tuesday, the S&P 500 Index gained nearly 10% on hopes Congress will pass a massive spending plan to help boost an economy that has been brought to an abrupt halt by the global coronavirus pandemic.

And for a change, short sellers’ efforts to protect their profits can actually end up helping long investors.

“If these short sellers see their sizeable, unrealized profits begin to get eaten away by a rebounding stock market, there is a good chance that they will start buying shares to lock in their remaining profits,” financial analytics firm S3 Partners’ Ihor Dusaniwsky said.

These short investors will then add to the buying demand in a market that is looking to buy off the lows and create an even steeper “hockey stick” price move in the more heavily shorted stocks, the analyst added.

Short sellers in the U.S. have amassed mark-to-market profits of nearly $320 billion so far this year, out of which about $250 billion have come in just this month. Last year this time their mark-to-market losses stood at about $104 billion, according to Dusaniwsky.

©2020 Bloomberg L.P.