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The squeeze is back on for short sellers. The Toronto Stock Exchange has rallied by more than 6 per cent during the first 3 weeks of November to stand within a whisker or two of pre-COVID-19 peaks. Give credit to the intoxicating cocktail of historically low interest rates, massive government spending and announced breakthroughs in COVID-19 vaccinations.

Short sellers are scrambling for the exits: the short position in the iShares S&P/TSX 60 ETF has tumbled to 16.5 per cent of its float – the lowest level this year. And loan fees on Canadian stocks dived in October to a year-to-date low of $22.4 million, according to a report by IHS Markit’s Sam Pierson.

Plenty of stocks are seeing short sellers covering their bets. Some other stocks are not getting off so easy. Let’s survey the current landscape to see what’s happening on the front lines of the battles between the bulls and bears. And while we’re at it, let’s check in with the financial scholars for an update on their recent research work into short selling.

Significant decreases in short interest during the 3 months to Nov. 24

SecurityDecrease in short sales ($-mil)% decrease in short sales% change in stock price% decrease in short sales after adjusting out stock price change
Shopify Inc.SHOP-T-$1,260.7-45.3%-3.5%-43.3%
Lululemon Athletica Inc.LULU-Q-$549.0-31.7%-5.5%-27.8%
iShares S&P/TSX 60 ETFXIU-T-$508.0-23.3%3.7%-26.0%
Franco-Nevada Corp.FNV-T-$335.9-39.2%-12.5%-30.5%
CN RailwayCNR-T-$334.4-25.4%2.7%-27.3%
CP RailwayCP-T-$152.6-16.9%7.7%-22.8%
Kinross GoldK-T-$146.9-41.6%-18.0%-28.8%
CGI Inc.GIB-A-T-$143.2-25.8%5.0%-29.3%
Waste ConnectionsWCN-T-$99.6-25.1%1.0%-25.9%
Ovintiv Inc.OVV-T-$90.7-17.1%15.6%-28.3%
Dollarama Inc.DOL-T-$90.0-32.9%0.0%-32.9%
SNC-Lavalin GroupSNC-T-$83.7-29.7%-1.0%-29.0%

Source: S3 Partners

U.S. trades of inter-listed stocks are included (after converting to CAD); Excludes stocks whose % decrease in short sales (after adjusting out stock price gains) is less than -20%; Excludes stocks with decreases in short sales of less than $80-million.

Based on data from S3 Partners, stocks with large drops in short interest in the 3 months to Nov. 24 include Shopify Inc., Lululemon Athletica Inc., Franco-Nevada Corp., Canadian National Railway Co., CGI Inc., Ovintiv Inc., Dollarama Inc. and SNC-Lavalin Group Inc.. The percentages of float short for these companies are quite low – except for Ovintiv (10.2 per cent) and SNC-Lavalin (4.9 per cent).

Note that dollar values for short positions are affected by changes in stock prices. Often they are not much of a concern. But when big swings occur like this month, the price changes should be adjusted out of short positions to get at the changes due only to short-seller trades (last column).

Although short sellers are winding down positions in many stocks, some are still swimming against the tide and raising bets on other stocks, including Bank of Montreal, Ballard Power Systems Inc., Canadian Solar Inc. and Great Canadian Gaming Corp.. The percentage of float short for these companies is rather high for Ballard Power (10.8 per cent), Canadian Solar (11.2 per cent) and Great Canadian Gaming (7.8 per cent).

Significant increases in short interest during 3 months to Nov. 24

SecurityIncrease in short sales ($-mil)% increase in short sales% change in stock price% increase in short sales after adjusting out stock price change
Bank of MontrealBMO-T$671.5 46.7%18.7%23.6%
Ballard Power SystemsBLDP-T$316.0 128.7%18.8%92.5%
Canadian Solar Inc.CSIQ-Q$187.5 240.9%47.6%130.9%
Algonquin Power & UtilitiesAQN-T$127.1 59.3%10.6%44.1%
CAE Inc.CAE-T$125.2 198.4%63.0%83.1%
Cenovus EnergyCVE-T$120.6 47.6%8.5%36.1%
Great Canadian Gaming Corp.GC-T$107.6 203.6%42.3%113.3%

Source: S3 Partners

U.S. trades for inter-listed stocks are included (after converting to CAD); excludes stocks whose % increase in short sales (after adjusting out stock price gains) is less than 20%; excludes stocks with increases in short sales of less than $100-million.

Once again, note that the dollar values of short positions are altered by changes in stock prices. To isolate changes related only to short sellers, price changes are adjusted out (last column).

As measured by the percentage of float sold short, bearish sentiment also remains high on other stocks. The top twenty include Cronos Group Inc. (and many of the other usual cannabis suspects), Alpha Pro Tech Ltd., VBI Vaccines Inc., Advantage Oil & Gas Ltd., Canada Goose Holdings Inc., AutoCanada Inc. and Lions Gate Entertainment Corp.. The cannabis firms have issued a lot more shares over the past year but the cost to borrow their shares still remains elevated.

The 20 largest short positions as percentage of float (as of Nov. 24)

SecurityShort interest as % of floatCost of borrowShort interest ($-mil)
Cronos Group Inc.CRON-T29.7%1.7%$499.08
Alpha Pro Tech Ltd.APT-A29.2%6.6%$54.96
Tilray Inc.TLRY-Q27.7%27.6%$217.55
Aurora Cannabis Inc.ACB-T25.4%20.6%$287.97
Westshore Terminals Corp.WTE-T24.9%0.3%$166.05
First Majestic Silver Corp.FR-T23.0%0.9%$552.69
VBI Vaccines Inc.VBIV-Q21.6%2.1%$161.29
Canopy Growth Corp.WEED-T21.1%2.0%$1,540.21
Village Farms Intl Inc.VFF-T19.1%14.8%$129.65
iShares S&P/TSX 60 ETFXIU-T16.5%0.8%$1,673.78
Advantage Oil & Gas Ltd.AAV-T16.4%1.7%$64.72
Canada Goose HoldingsGOOS-T16.1%1.0%$444.09
Lithium Americas Corp.LAC-T15.2%23.3%$119.78
Tucows Inc.TC-T15.2%0.9%$105.95
AutoCanada Inc.ACQ-T15.0%6.7%$102.24
Lions Gate Entertain Corp.LGF-A-N14.2%0.3%$134.36
Neptune Wellness Inc.NEPT-T13.7%42.6%$27.34
Aphria Inc.APHA-T13.7%1.7%$327.98
Energy Fuels Inc.EFR-T13.1%4.2%$40.14
Organigram HoldingsOGI-T12.2%9.0%$34.31

Source: S3 Partners

U.S. trades are included for inter-listed stocks (after converting to CAD)

Peer-reviewed studies on short selling

Finance professors and other academics regularly carry out studies into short selling, and submit their papers for publication in peer-reviewed journals. Here are some highlights from research papers released within the past two months.

Short‐Sale Constraints and Informational Efficiency to Private Information (Oct 9, 2020), published by Hae Mi Choi in the Financial Review

The author’s study finds, consistent with earlier studies, that short sellers are informed traders who anticipate bad news from companies, making the stock market more efficient by “increasing the speed of adjustment of stock prices to private negative information.” The effect is stronger for firms that are small or have high dispersion in analysts’ forecasts.

The Loan Fee Anomaly: A Short Seller’s Best Ideas (Nov. 3, 2020) by Joseph Engelberg (University of California) and several other academics

The authors find that lending fees on stocks are “the best predictor of cross-sectional returns.” Compared to 102 other predictors, loan fees have the highest monthly return, and unlike other anomalies, exhibit strong persistence.

Borrowing Fees and Expected Stock Returns” (Nov. 6, 2020) by Kaitlin Hendrix and Gavin Crabb (both with Dimensional Fund Advisors)

Using lending fees from 14 stock exchanges between 2011 and 2018, the authors find that stocks with high borrowing costs tend to underperform their peers over the short term.

A Ripple in the Muddy Waters: The Luckin Coffee Scandal and Short Selling Attacks (Nov. 13, 2020) by Zhe Peng (Wilfrid Laurier University)

Accusations of accounting fraud by activist short seller Muddy Waters Research brought down Luckin Coffee earlier this year. Before Muddy Waters’ attack, there were four other short-seller attacks in 2019, notes the author. They encountered short squeezes, or generally failed to earn significant profits. The Luckin case illustrates that process of bringing an overvalued stock in line with company fundamentals is often a messy and extended one.

Surprise in Short Interest (Nov. 23, 2020) by Matthias X. Hanauer (Technical University of Munich), and other academics

The authors follow most studies in using the percentage of a company’s shares sold short as the basis for their indicator measuring bearish sentiment. But instead of focusing on the level, they first take the level’s difference from the trend (12-month moving average) and then divide by the standard deviation to control for dispersion around the trend. One might think of these adjustments as an attempt to extract more accurate information on directional bets by smoothing out short sales tied to hedging and market making. Their findings confirm that short sales, on average, predict underperformance. Also, they report that selling stocks in the top ten per cent of bearish readings and buying the bottom 10 per cent outperforms the market by 4 to 6 per cent.

Larry MacDonald can be reached at

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