Short selling on the rise as rosy retail investors go gloomy
Sceptical retail investors are betting on a sustained slide on forex and commodity markets this year with short positions surging in the past quarter, new data has revealed.
Short positions, in which traders look to profit from falling asset prices, ticked up to 38 per cent between April and June on retail platform Capital.com, which hosts over four million registered retail traders.
The figure marks a sharp rise of 34 per cent on the previous quarter as investors remain sceptical of a rebound on global markets as inflation continues to run rampant and the likelihood of a global recession grows.
Forex markets were the most shorted instrument on Capital.com’s platform between April and June, with investors piling into positions against the US dollar’s prospects against other currencies, particularly the Japanese yen where inflation has remained tame compared to Western nations.
Analysts at Capital.com said the rise of short selling on the whole marked a downturn in sentiment from typically optimistic retail investors.
“As a general rule, self-directed traders and investors seldom short-sell. They are so used to buying first and selling later that it’s psychologically very difficult for them to come out of this way of thinking,” said David Jones, chief market strategist at Capital.com.
“Our findings show there has been a sharp rise in clients short-selling in Q2, which shows just how significant the drop in many markets has been. This may have forced many retail traders to change their mindset.”
Around 20 per cent of equity trades were shorts, the lowest of any instrument on the platform, as investors look to scoop up bargains while valuations remain depressed.
However retail investors piled into bets against ailing US video game retailer Gamestop, which was the most shorted stock on the platform with 36 per cent of trades betting on the stock falling. Chipmakers Nvidia and AMD were among the top five as with 35 and 32 per cent, respectively, as a global shortage of chips caused investors to pile in.
The short data comes as investors this week began to edge back in equity markets however amid a rosier than expected earnings season for blue chip US firms.
Data from retail investment platform Vanda found that aggregate buying of US securities among retail investors over the last five days was above the average for the year, with $1.39bn spent against an average of $1.24bn this year.
“Opportunities arising from earning season and the rebound in equity markets have attracted the attention of retail investors,” said Lucas Mantle, data science analyst at Vanda.
“We expect retail purchases to remain relatively strong over the next few days, but they could drop thereafter as the core part of earnings season comes to an end, while the lack of catalysts in August will discourage further engagement.”