Institutional investors have been paring their bearish bets on Wall Street’s most heavily shorted stocks in response to increasing appetites for riskier bets, according to strategists at Vanda Research.
Short-sellers are bearish investors who borrow stocks, aiming to buy them back when the price falls to cover the loan and pocket the difference.
Heavily shorted stocks were rallying on Wednesday and short-sellers were forced to leave bearish bets to curtail their losses, a situation known as a short squeeze.
“We believe institutional investors were forced to cover their shorts, either because they were de-grossing or because they feared that a rebound in risk sentiment could inflict pain on their short book,” Vanda strategists Ben Onatibia and Giacomo Pierantoni said about Wednesday’s session.
Some of the top shorted United States traded stocks, in terms of percentage of shares sold short, have been rallying recently, according to the latest data from S3 Partners.
The top short, Big 5 Sporting Goods (BGFV.O), with 41.5% of its float sold short, had risen almost 4% in the last three sessions but was down 0.5% on Thursday. Altimeter Growth Corp (AGC.O), with 36% of its shares shorted, was rallying 4% on Thursday with a sharp spike higher in trading volume.
Blink Charging Co (BLNK.O), which has 36% of its float shorted, was down 2.5% Thursday after rising 8% in the previous three sessions while WorkHorse Group (WKHS.O), with 35% of its float shorted, was falling 2.5% Thursday after rising 10.6% in the last two sessions.
Meanwhile, Wall Street’s three major indexes were up more than 1% on Thursday after also gaining ground Wednesday.
Highly shorted names also got high retail mentions on Reddit’s WallStreetBets, the Vanda strategists said, noting that comments on such stocks on the forum was very close to the daily average in September and October.
Retail investors, however, had nothing to do with the short squeeze, the strategists said, as individual purchases of these stocks on Wednesday were a lot smaller than most days in September and October.
On WallStreetBets, an investor forum on Reddit.com, some commentators were pointing out on Wednesday that it was a rough session for bearish investors.
“Out there somewhere is a bear crying…” one WallStreetBets member wrote.
Vanda argued that if the short squeeze continues in stocks “it could eventually lure retail investors to abandon crypto investments” as they say “that rotations between those two asset classes are very common.”
Reporting by Medha Singh in Bengaluru, Sinéad Carew in New York; editing by Uttaresh.V and David Gregorio