For the month ending March 28, short sellers trimmed their bearish bets on the direction of the Toronto Stock Exchange, as proxied by a drop in the short position for the iShares S&P/TSX 60 ETF (XIU-T) to $2.2-billion from $2.9 billion. XIU’s price gained 4.4 per cent over the month.
At the company level, Air Canada (AC-T) led the way with 33.7 per cent of its float sold short, according to data-analytics firm S3 Partners. This is the eighth month in a row that the company has been at, or near, the top of the list for the 20 most shorted companies.
Airlines cannot get a break. After the Omicron variant of COVID-19 ebbed in February, oil and gas prices spiked following Russia’s invasion of Ukraine on Feb. 24. Fuel is a major cost for airliners. But Air Canada’s short position may reflect, at least in part, hedging by holders of its convertible debt – so, the size of the short position could exaggerate bearish sentiment.
Cannabis stocks have been on the top-20 list of shorted stocks for more than two years. Appearing this month were: Canopy Growth Corp. (WEED-T), Aurora Cannabis Inc. (ACB-T), Hexo Corp. (HEXO-T), Tilray Inc. (TLRY-T) and Sundial Growers Inc. (SNDL-Q). A recent mini-rally in cannabis stocks was likely linked to speculation that cannabis may soon be legalized at the federal level in the United States. But industry competition remains high due to the number of producers, home production and black-market sales.
Short interest was 22.6 per cent of float for Lion Electric Co. (LEV-T), a maker of electric trucks and buses. It went public a year ago through a special purpose acquisition company (SPAC). Early-stage renewable energy companies offer significant promise, but their rich valuations are wilting as monetary policy shifts to dampening the economy to fight inflation. But recent spikes in oil-and-gas prices could potentially revive the appeal of electric vehicles.
Largest increases in short positions by dollar value
During the three-months to March 28, chartered banks dominated the list of companies with the largest increases in short sales.
Largest decreases in short positions by dollar value
During the three-months to March 28, the top three companies with declining short sales were: Canadian Pacific Railway Ltd (CP-T), Shopify Inc. (SHOP-T) and Brookfield Asset Management Inc. (BAM.A-T).
Trend in short interest in U.S. stocks as a percentage of shares outstanding
Matthew Ringgenberg, a professor of finance at the University of Utah, concluded in his 2006 study published in the Journal of Financial Economics that “short interest is arguably the strongest known predictor of aggregate stock returns.”
Since then, he has updated his time series, which show that the downtrend of recent years is still in place (as shown in the accompanying chart). According to Prof. Ringgenberg, this decline in bearish bets is a bullish signal for the stock market in the year ahead. Unlike the run-up to the Crash of 2008, there currently is no rising trend in short interest.
Larry MacDonald writes at Investing Journey (https://larrymacdon.substack.com/archive)
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