Short sales on the TSX: What bearish investors are betting against

Keeping track of short-selling activity can help investors avoid the torpedo stocks that sink investment portfolios, academic studies have found.

With this in mind, the Globe and Mail presents regular updates highlighting recent short sales on the Toronto Stock Exchange. For the month ending April 16, some of the main developments are:

• Short interest at the market level remains well below levels of 6 months ago
• Short interest at the sector level shows notable increases for bitcoin and bond ETFs, as well as a notable decrease for the BMO S&P/TSX Banks Equal Weight ETF
• Data on short sales at the company level from S3 Partners show sizable increases in Telus Corp., Lithium Americas Corp. and goeasy Ltd., and sizable decreases for bank stocks
• Concerns were raised regarding the misuse of short-selling statistics

Market-level short interest still relatively low

Bearish bets at the market level, as proxied by the short position in the iShares S&P/TSX 60 ETF (XIU-T), have ticked up – but remain well below six months ago. Short interest in XIU stood at 18.2 per cent of issued units in mid-April, compared to 21.6 per cent in mid-October.

In dollar terms, short sellers’ exposure to XIU was $1.82-billion this month, down about 10 per cent from the level of $2.02-billion 6 months ago. There was a 17.5-per-cent gain in the price of XIU over the period.

Bitcoin ETFs are attracting higher short interest

Several bitcoin ETFs have recently launched on the TSX. They now make it quite easy for bearish speculators to short bitcoin. With its price up more than 750 per cent (U.S. dollars) over the past year, it wouldn’t be surprising to see heightened speculation that bitcoin is close to losing some of its shine. Indeed, short sellers did ramp up bets recently against the bitcoin ETFs.

Higher short sales of bond ETFs

Short interest is rising in U.S. bonds, as indicated by the climb to 22.6-million units short in the iShares 20+ Year Treasury Bond ETF (TLT-Q). Since bond prices and yields are inversely related, this suggests the recent increase in yields could go higher.

About the only Canadian bond ETF with noteworthy short sales is the iShares Core Canadian Universe Bond Index ETF (XBB-T), which tracks a broader index of government and corporate bonds. Here, the trend is somewhat weaker but nonetheless there is a huge jump in April to nearly 1-million units short.

Short interest in iShares 20+ Year Treasury Bond ETF in 2021

Short interest in iShares Core Canadian Universe Bond Index ETF for 2021

Large decline in the short position for a banking ETF

Short interest in the BMO S&P/TSX Equal Weight Banks ETF (ZEB-T) tumbled by nearly half over the month to $216.8-million. The buying frenzy in the housing market likely means much better earnings from mortgage lending, especially as lending margins improve with the widening of the spread between long-term and short-term interest rates.

Companies with notable changes in short interest over the month

The table, Top 10 companies with notable 1-month increases in short sales, shows the largest increases in the dollar value of short interest for companies with 3.5 per cent or more of float sold short. Telus Corp. (T-T) stands out with a particularly large jump in short interest.

Note: short interest may not always be a speculation on lower prices. It can also reflect hedging or arbitrage exploiting price discrepancies between stocks and convertible securities.

The table, Top 10 companies with notable 1-month decreases in short sales, shows the largest decreases in the dollar value of short interest at the company level. The banks are well represented.

The table of the Top 20 companies with the highest percentage of float sold short lists many of the usual suspects. There are a few newcomers, though, and one leaped high onto the table, into third place: ABC Technologies Holdings Inc. (ABCT-T). It’s a provider of thermoplastic parts for car makers that has been around since 1974 but just started trading on the TSX two months ago.

Most of the entries on the table recorded decreases in the dollar value of short interest over the month. A handful recorded increases, most notably: iShares S&P/TSX Capped Utilities ETF (111.3 per cent), Lithium Americas Corp. (51.3 per cent) and Canadian Solar Inc. (11.8 per cent).

The misuse of short-selling statistics

Ihor Dusaniwsky, managing director at S3 Partners, is at it again. In last month’s update, there was a summary of his view that calculations of the percentage of float short should consider inclusion of synthetic long positions – as arise when an investor buys from a short seller, creating a long position on borrowed shares (which can be seen as increasing the float count).

Now, Mr. Dusaniwsky is opining on the misuse of this indicator (whether calculated correctly or not). “A decline in [the percentage] does not necessarily mean that there is less short exposure of a stock in the market, it just means that there are fewer physical shares shorted,” he claims.

Short sellers evaluate their exposure on the basis of the dollar value of their positions and this is how the level of bearishness should be assessed. To illustrate, he gives the following example:

“As an example, $100 million of short exposure in GameStop would have taken 9.5 per cent of its float on December 31st, 2020 [when the stock price was $19.26] but only 0.9% of its float on March 17th, 2021 [when the stock price was $209.81]. Short interest as a per cent of float declined by 92 per cent but short interest remained unchanged.”

While the percentage of float short, or even changes in the number of shares shorted, can often be a close approximations to bearish sentiment, this may not be the case when there is significant trending in stock prices (as often happens over longer periods of time). In these scenarios, the change in the dollar value of a short position should be cited at least alongside the other measures, if not on its own.

Larry MacDonald can be reached at mccolumn@yahoo.com

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