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Oct 29, 2018

S3 Analytics: FAANGS Losing Their Teeth – Shorts up $1.6 Billion Last Week

FAANG stocks (FB, AMZN, AAPL, NFLX & GOOGL) were down 4.7% last week, 3.6% on Friday alone, after Amazon.com and Alphabet announced disappointing quarterly results amid overall weakness in the tech sector. While long shareholders incurred large losses from these widely held stocks, short sellers made $1.62 billion in mark-to-market profits last week.

The five FAANG stocks are all in the top ten most shorted U.S. equities which indicates that there are more reasons to short these names besides pure Alpha generation on the short side of a portfolio. While a portion of the short non-Alpha trading can be attributed to option and future hedging, most of the non-Alpha trading is related to portfolio Beta hedging.

Shorting the FAANG stocks provides a portfolio manager more hedging bang for the buck than by shorting a basket of S&P securities. This week the S&P 500 declined by -3.9% while the FAANG stocks declined by -4.7%, a 18% outperformance on the downside by the FAANG stocks which supports the theory that a significant amount of FAANG short interest is a hyper-charged Beta hedge for many portfolio managers. In addition to acting as a portfolio hedge, momentum short sellers continue shorting these out-performing stocks looking for price reversions, which was a losing proposition for all the FAANG stocks besides Facebook in 2018.

FAANG short sellers were up $1.3 billion in mark-to-market profits on Friday and $1.6 billion for the week. There was increased short selling in the FAANG stocks throughout all of October, and we expect continued short selling as this tech reversal continues. Facebook shares shorted increased by 2.9 million shares; Amazon by 1.5 million shares; Apple by 1.6 million shares; Netflix by 419 thousand shares; and Alphabet by 58 thousand shares. In total, FAANG shares shorted increased by 7% in October.

When tech rallies again, we will probably see short covering of a larger percentage of the October FAANG short selling activity as the notional $ short interest increases. These buy to covers will act as accelerants to any FAANG’s upward price movements, October’s significant increase in shares shorted will increase the potential for some volatile swings to the upside.

Research Note written by Ihor Dusaniwsky
Want deeper insight into the above analysis?
Contact:  Ihor.Dusaniwsky@S3Partners.net
                 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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