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Oct 17, 2017

S3 Analytics: Bank & Brokerage Short Interest up $2 billion Prior to Earnings Season

Short interest in the Diversified Banking and Investment Banking & Brokerage Sectors is $16.7 billion, an increase of $2 billion, or 14%, over the last month. Short interest had been declining slightly in 2017, down 5% to $14.7 billion in mid-September, but short selling has increased over the last month albeit it has been relatively flat over the last week in anticipation of 3rd quarter earnings releases. Short sellers have built up their positions and are sitting tight on their exposure as they await earnings results.

Both Goldman Sachs (GS) and Morgan Stanley (MS) beat earnings forecasts this morning but with differing stock price results, Goldman is down 1.85% and Morgan is up 0.70% in mid-morning trading. Goldman short sellers are up $31 million in mark-to-market profits and Morgan short sellers are down $6 million in mark-to-market losses. Overall, the top ten most shorted stocks in these two sectors are up $36 million in mark-to-market profits for the day.

Banks, investment banks and brokerages have been plagued by an overall lack of market volatility which has limited proprietary trading opportunities and revenues, especially in the fixed income markets. But with Fed activity expected to increase over of the next year volatility should move closer to historical norms. Luckily revenues in other departments, primarily wealth management and M & A, have performed well to offset the underperforming trading desks. With short interest relatively flat over the last week, short sellers are comfortable with their existing exposure and not looking to back up their bets.

If revenues for the sector prove to be strong across the board we should expect short interest to decrease back to late summer levels, which would result in $2 billion of buy to covers to hit the street – creating a tailwind in the group. The Financial Select Sector Spider ETF (XLF) is up 14% in 2017 and recently moved through a $25 resistance level – a near term long rally would confirm the breakout and lure more momentum buyers into the sectors. Additional and concentrated short covering in stocks that had a sizable increase in short interest over the last month such as Bank of America (BAC), Citigroup (C), Goldman Sachs (GS) and Schwab (SCHW) would only add to overall buying demand and push stock prices even higher.

Want deeper insight into the above analysis? Contact: 
Managing Director Predictive Analytics, S3 Partners, LLC
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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