With September coming, the time of the year is most susceptible to stock market corrections. We have not seen too many of these seasonal downturns in recent years, but the choppiness in trading this past week - highlighted by an upward spike of more than 35 percent in the CBOE Volatility Index - suggests dark clouds may be gathering. Short sellers might be seeing it differently, more like blue skies on the way.
In September, luxury parka maker Canada Goose Holdings Inc. continued to be one of the most shorted companies on the Toronto Stock Exchange, with 29.3 per cent of its float borrowed and sold. In August, the company said it was lowering its forecast for sales because the post-pandemic buying spree in the U.S. was fading in the face of stubbornly high interest rates and inflation. Canada Goose's earnings in China had good momentum at the time, but in the months since, there have been signs of a slowdown in that country's economy.
Increases in short positions are a sign of rising bearish sentiment. This month, Great-West Lifeco Inc. placed it on the list of companies with the largest 30-day increase by dollar value. The $403.9-million jump was an escalation of 26.9 per cent over the past month, bringing the total of the short position on Sept. 27 to $1.9 billion, or 17.3 per cent of float. Although short selling can sometimes be bearish, it should be kept in mind that sometimes short selling will reflect hedging or arbitrage motives.
Decreases in short positions can indicate a decline in bearishness. Two banks are the top of the list, with the largest 30-day declines by dollar value. Royal Bank of Canada's short position dropped by $425.4 million to just 1.3 per cent of the float, while Bank of Montreal's short position fell by $112.6 million to 2.9 per cent of the float.
The cost of borrowing shares is another indicator of short seller sentiment. A stock with a high borrowing cost usually means that short sellers are eager to put up bets, but there isn't enough loanable shares available.
Many of the listed companies have had to borrow their shares for more than 50 percent for a year or more. If you own any of these stocks, some brokers will share the borrowing fees with you. The shares of Interactive Brokers are half, which is still a pretty high return when applied to an interest rate of 88.6 per cent for example. Note that borrow rates fluctuate daily and can trend lower. Plus, some of the companies may be going concerns.
Veritas Investment Research, Toronto - based, has issued several sell or reduce recommendations on companies in recent weeks. Veritas doesn't underwrite IPOs, giving its analysts more freedom to issue independent investment research.
1). Some short positions can reflect, in part or whole, hedging/arbitrage positions - so they are not completely bearish bets; if bearish sentiment is extreme, it can sometimes trigger a short squeeze that sends the stock price up.
3) Short positions on inter-listed stocks were summed in Canadian dollars across exchanges.
3) When an investor buys a stock sold by a short seller, it generates a synthetic long position; if these long positions are not included in the float count, the percentage-of-float-short metric can be overstated - however, the magnitude is not significant.
4) The percentage of float shorts for ETFs is impacted by the mechanism for creating/redeeming units, which results in almost daily changes in the number of units issued. The percentage of float short for ETFs appears to be more volatile than for stocks.