The market’s comeback in 2023 has been very bad news for one group: short sellers.
Short sellers profit from stock declines by borrowing shares of companies that they believe are overvalued, selling them, and then buying them back at a lower price later. They made huge gains in 2022, when markets around the world tumbled.
But their fortunes have reversed in January as the stock market has clawed back some of its losses.
A Goldman Sachs index tracking the 50 most shorted stocks in the Russell 3000 has returned 15% so far this year through Thursday, substantially outperforming the S&P 500, which is up 6%. Other stocks that got crushed in 2022 have also raced higher.
Tesla Inc.,
TSLA 11.00%
coming off its worst year on record, has staged a 44% January rally. Meanwhile, money-losing cryptocurrency exchange
Coinbase Global Inc.
COIN 15.75%
is up 73%.
Short sellers who have incurred hefty losses are actively trimming their positions, said
Ihor Dusaniwsky,
managing director of predictive analytics at S3 Partners. Investors betting against stocks have racked up $81 billion of mark-to-market losses on short positions this month through Thursday after accumulating $300 billion in gains in 2022, Mr. Dusaniwsky said.
Investors and analysts say the rally appears to be driven by a few things. Signs that inflation is cooling have stoked bets among investors that the Federal Reserve will pivot from raising interest rates to cutting them as soon as the second half of the year. That has helped risky assets across the board rise. Especially risky corners of the market, such as stocks with high short interest, have rallied even more. Analysts say that has likely forced short sellers to close out bearish positions to cut their losses—resulting in what is known on Wall Street as a short squeeze.
“We’re seeing a mirror image of the performance within the equity…
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