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Jun 13, 2017

S3 Research: FAANG Short Performance Beats the Largest Tech Shorts in Recent Tech Selloff

Over the previous two trading days the Nasdaq fell by 3.5% and both the Powershares QQQ Nasdaq 100 ETF (QQQ US) and the Technology Sector Spider ETF (XLK US) were down 3% following a major sell off in tech sector stocks.

While tech sector stocks suffered losses, the broader market was barely touched. The Russell 1000 was down 0.17%, the 2000 was up 0.25% and the 3000 was down 0.14% over the last two trading days. Even within the tech sector, the selloff was unequally distributed. FAANG stocks were the punching bag of the tech selling activity as exhibited by the performance of tech short sellers.

In aggregate, short interest in the six FAANG securities was $27.66 billion and mark to market P/L on those short positions was a gain of $1.62 billion, or +5.86%, over those two trading days. These returns beat the return of the overall Nasdaq index by 236 bps. In contrast, short interest in the top ten most shorted non-FAANG tech securities was $23.99 billion and the gain on these ten securities over the last two trading days was only $133.2 million, or +0.56%. The ten most shorted non-FAANG stocks underperformed FAANG shorts by 530 bps.

Clearly the two day tech selloff hit the “usual suspects” harder than the rest of the tech sector. When long shareholders were looking to unload tech exposure they sold off pieces of their most popular and larger positions, which also were the ones with the largest unrealized year-to-date profits. Investors were looking to not only reduce their market exposure, but also to realize profits before they vaporized.

It is also obvious that the two day tech slump was a long shareholder selloff and not due to short sellers driving down stock prices. FAANG short interest only increased by $187 million, or 0.78%, from June 8th to June 12th. The $187 million in additional FAANG short interest represents only 0.29% of the aggregate $64.6 billion of total trading volume in FAANG stocks over those two days.   

We can see that long tech selling on June 9th to June 12th was concentrated in the FAANG securities, and short selling and short covering was minimal. When the tech market rebounds we would expect an equal and opposite action with long shareholders again concentrating their tech buying in FAANG. Whether it is the age of wisdom or foolishness, both shorts and longs continue to trade in the most liquid and active tech stocks – which are the FAANG stocks. With FAANG short sellers down $3.5 billion year-to-date, the age of wisdom for the moment belongs to the long FAANG shareholders.

Want deeper insight into the above analysis? Contact: 
Head of Research, S3 Partners
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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