Market News: Smart Bears Are Starting to Profit

Market News: Smart Bears Are Starting to Profit

bear market, business bear


The overall market keeps marching to new highs, but one group of smart bears are making money from it. In quite a turnaround from a year ago, the most heavily shorted stocks of the S&P 1500, —those that have the largest bearish positions — got crushed in September (through 9/27), falling 4.25% on average compared to a small gain for the S&P 1500.

This not only stands in contrast to the 1.7% gain for the S&P 500, but is a dramatic turnaround from a year ago when 20 of the most heavily shorted shares posted a 10.31% average gain in September. That vastly outpaced the mere 1.2% lift in the broader market for that month.

That means from a year ago, the shorts went from pain to gain. I think this change in performance is a good and healthy sign for the overall market.  It means investors are becoming more discerning and the companies that a group of smart investors feel the fundamentals don’t support a current valuation, are being rewarded rather than squeezed by indiscriminate buying.

Where the Bears Roam:

Tesla (TSLA) is among the most heavily shorted in terms of both dollar amount ($9.9 billion) and percentage of float (26%). It also most contentious as the company and its founder Elon Musk make headlines daily. The cult-like bulls are convinced TSLA will become a trillion dollar company and change the world.  The bears think Musk is a fraud and the company will go bankrupt. They’ve each have had moments of pleasure and pain as the stock has swung wildly between $250 and $320 — twice during the month.  For now, it’s a draw as the shares are basically flat on month and the year.

Applied Optoelectronics (AAIO), with 39% of the float short, delivered the best gains for the shorts, as shares dropped a whopping 31% during September.

Other names that were honeypots for bears were Medicines (MDCO) with 27% float short, saw shares drop 25% during the month and Restoration Hardware (RH) off 17%.

Gamestop (GME) delivered the most pain as shares, of which 31% are sold short, jumped 16.7% during the month.  But the stock is still down some 15% for the year to date.

The upshot is, the market is now offering good two-sided action where smart stock can identify winning bearish trades within the big broad bull market.