In mid-afternoon trading the S&P 500 and Nasdaq are down -1.6 and -1.8% respectively, while the FAANG stocks, Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOG & GOOGL) are down -3.0%. FAANG short sellers are up $980 million in mark-to-market profits today, making back an eighth of their year-to-date losses in just one day. Shorting FAANG stocks has been a profitable play recently, with short sellers up $1.59 billion, or 4.1%, since Monday, March 12th. Even with their recent windfall profits, FAANG shorts are still down $5.15 billion in year-to-date mark-to-market losses.
FAANG short exposure has increased by a third in 2018 even though short sellers were down -$6.13 billion in year-to-date mark-to-market losses prior to today’s market correction and down -$9.08 billion in mark-to-market losses in 2017. FAANG short interest averaged $25.2 billion in 2017 as short sellers endured a -36% yearly return. AAPL has had the largest increase of short interest in 2018, with $3.7 billion of new exposure while FB has had the smallest increase, with only a $664 million increase in short exposure.
Traders have been targeting the FAANG stocks for both Alpha and Beta exposure. Shorting these stocks is not only a pure value play but also a portfolio hedge in lieu of shorting index Futures and ETFs. With, according to Bloomberg, an average Beta vs. the S&P 500 of 1.17, traders can expect to earn a greater relative return in a volatile market downturn. In addition, with so many of these stocks in passive investment vehicles such as ETFs and Funds, these stocks are prone to accelerated negative returns when these massive long shareholders have to sell a portion of their holdings due to redemptions which occur in size after significant market downturns.
FAANG short exposure makes up only 5% of the U.S. equity markets total short exposure, but it made up 30% of the total increase in short exposure for the year, the total increase in U.S. equity short interest increased by $32.4 billion of which $9.6 billion was in FAANG stocks. Since it is highly unlikely that short sellers suddenly found a value based or Alpha reason to short FAANG stocks in such magnitude, this must have been an increased Beta hedge in response to the fear that the eight year bull market is close to running its course.
We should see mixed activity on the FAANG short side for the rest of the week. There will be some covering by shorter term sellers looking to realize their sudden profits, and increased short selling by traders using the FAANG stocks as a Beta hedge for their long portfolio. In the very near term, there will probably more buy to cover activity, but over the long term, continued short selling should keep FAANG stocks as a group to be the most shorted equities in the U.S. market
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Managing Director Predictive Analytics, S3 Partners, LLC
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