Short Sellers Cash In: $159 Billion in 6 Days

In the high-stakes world of finance, short sellers have emerged as the unexpected winners in the escalating trade war, minting a staggering $159 billion in paper profits over just six trading days. The U.S. stock market, once a bastion of stability, has plummeted by more than 10% following President Donald Trump's announcement of sweeping worldwide tariffs. This dramatic shift has created a goldmine for those who bet against the market, turning a bearish outlook into a lucrative opportunity.

The biggest market drawdown since 2022 has made bets against an exchange-traded fund tracking the S&P 500 index, known as SPY, the most profitable short bet in recent history. Traders wagering that the ETF would fall have so far accumulated paper profits of more than US$6.1 billion this month, according to an S3 report. This data highlights the extent to which short sellers have profited from the market downturn, which can further amplify market volatility and uncertainty.



The significant gains by short sellers also suggest that there is a risk of further market instability. With another US$46 billion of new short bets made in April, there’s a risk that these contrarian wagers could amplify the next big shift in the market, especially if current weakness reverses and sends the major indexes higher. This dynamic could lead to increased volatility as short sellers exit their negative positions by buying back shares, potentially boosting upside momentum for the overall market.

Moreover, the data from Ortex Technologies shows that short sellers targeting U.S. companies have gained $127 billion on paper from April 2 through Monday after President Donald Trump's plans for sweeping tariffs sparked a sharp selloff in stocks. This further underscores the bearish sentiment and the potential for continued market volatility. The rapid increase in short interest for various stock indexes from around the globe, which peaked on April 4 before starting to drop, indicates that investors are growing less bearish as well as profit-taking. However, the overall sentiment remains cautious, with falling short interest typically indicating investors growing less bearish as well as profit-taking.

The recent gains of short sellers have contributed to a bearish market sentiment and reduced investor confidence in the U.S. stock market. The substantial profits accumulated by short sellers, coupled with the ongoing trade war and market volatility, suggest that the market remains uncertain and prone to further fluctuations.

In light of the significant short-selling profits, investors considering entering or exiting the market face both potential risks and opportunities. The market has experienced wild intraday swings, erasing trillions of dollars of market value. This volatility can amplify the next big shift in the market, especially if current weakness reverses and sends major indexes higher. As Ihor Dusaniwsky, managing director of predictive analytics at S3, noted, "Overall, the short side was an extraordinarily profitable trade up and down the market during this correction. 81 per cent of every short trade was profitable and 97 per cent of every dollar shorted was a profitable trade." This indicates that the market is highly unpredictable, which can be risky for investors.

Short sellers who have made significant profits may face margin calls if the market rebounds. As the market hits a floor and starts trending upwards again, short sellers will likely exit their negative positions by buying back shares, which could boost upside momentum for the overall market. Dusaniwsky further explained, "When the market hits a floor and starts trending upwards again, we should expect a slew of buy-to-covers as the mark-to-market increase of shares shorted creates a short side over-exposure in hedged portfolios and short sellers look to realize their mark-to-market gains." This could lead to a rapid increase in stock prices, causing losses for those who are short.

With another US$46 billion of new short bets made in April, there’s a risk that these contrarian wagers further amplify the next big shift in the market. If the market reverses and sends major indexes higher, short sellers will be forced to cover their positions, potentially exacerbating market volatility on the way up as they did on the way down.

While there are significant risks associated with entering or exiting the market in light of the significant short-selling profits, there are also opportunities for investors to profit from short selling and potential market rebounds. However, investors must be cautious and well-informed to navigate the volatile market conditions effectively.