Short Bets on US Stocks Hit $1 Trillion, Most Since April 2022

(Bloomberg) — Short sellers are ramping up bets against US stocks even as paper losses on the positions surpass $100 billion.

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Total US short interest, or the amount traders have spent betting against US equities, exceeded $1 trillion this month as the S&P 500 Index extended its advance, S3 Partners LLC data show. The tally reached the highest since April 2022 before retreating slightly with stocks down for a third straight day.

The contrarian bets signal that some traders have concluded the S&P 500’s roughly 14% rally in 2023 will run out of steam, and they’re enduring steep losses as they wait for the market to turn in their favor. On paper, the positions are down about $101 billion this year, according to S3.

“There’s a hand-and-glove relationship between the success the market has had and the pessimism that builds up as that success grinds higher,” said Arthur Hogan, chief market strategist at B. Riley Wealth.

Building bearish sentiment can prove to be a source of support for the market, Hogan said. If shorts continue to be on the wrong side of the trade, they may need to buy back stocks to exit their positions, which could further boost equities, he said.

Read more: BofA Says Stock Bull-Market Means More Gains 92% of the Time

US stocks have gained in 2023 on better-than-expected earnings and a tech rally most recently fueled by frenzy around the potential for artificial intelligence. The S&P 500 entered a technical bull market this month, defying worries around a possible recession in the wake of the Federal Reserve’s aggressive campaign of interest-rate hikes.

Stocks declined Wednesday as Fed Chair Jerome Powell warned that higher rates would be needed to combat inflation.

Wall Street is divided on where stocks go next. While bulls may still have the upper hand after the S&P 500’s strong start to the year, bears insist that stocks are headed lower, with strategists such as Citigroup Inc.’s Scott Chronert reiterating downside targets.

Read more: Citigroup Says S&P 500 Above 4,400 Leaves No More Room for Gains

The individual equities with the highest short interest reflect a similar view that the AI-fueled tech rally may soon falter. Stocks including Tesla Inc., Apple Inc., Microsoft Corp. and Nvidia Corp. top the list, with short sellers adding to their trades even as losses grow.

Tesla bears have bet $26 billion against the stock this year and are carrying paper losses of more than $14 billion as the stock doubled, according to S3. There’s little sign they’re dumping the bets.

On Wednesday, Tesla shares dropped after Dan Levy, a Barclays Plc analyst, said the EV-maker rallied too quickly and downgraded the stock to equal-weight from overweight.