Short Sellers Earn $159 Billion as Trade Tensions Spark 10% Market Downturn

In a dramatic turn of events, short sellers in the U.S. stock market capitalized on escalating trade tensions, earning a substantial $159 billion in paper profits over just six trading days. This significant gain was triggered by a market downturn of over 10%, following the announcement of a large-scale trade war by former U.S. President Donald Trump. The SPDR S&P 500 ETF Trust (SPY) emerged as one of the most profitable short-selling targets during this period.

According to data from S3 Partners LLC, traders who bet against SPY accumulated over $6.1 billion in paper profits so far this month. The dramatic intraday volatility, which resulted in the evaporation of trillions of dollars in market value, presented an opportunity for short sellers to capitalize. However, the final profit will depend on when these traders decide to close their positions. S3 Partners' data also revealed that there were $46 billion in new short positions in April, which could amplify the next significant market movement, especially if the current weakness reverses and drives major indices higher.

Ihor Dusaniwsky, the managing director of S3 Partners' predictive analytics division, noted that short-selling has been highly profitable across the market during this adjustment period. He stated that 81% of short positions were profitable, and 97% of short funds came from winning trades. Other notable short-selling targets included Apple Inc., NVIDIA Corporation, and Tesla Inc. The Invesco QQQ Trust, which tracks the Nasdaq-100 Index, was among the top five most profitable short-selling trades for April. Each of these top five trades has generated over $2 billion in paper profits for short sellers.

The list of the most profitable short-selling stocks for April included several of the so-called "Magnificent Seven" large-cap tech stocks. Alibaba Group, Amazon.com Inc., and Microsoft Corporation were also among the top fifteen. In addition to NVIDIA, short sellers successfully bet against Advanced Micro Devices Inc., Broadcom Inc., and Marvell Technology Group Ltd.

The total short interest, or the total market value of shorted stocks, decreased by $114 billion, partly due to the decline in stock prices. If the market rebounds, short sellers may cover their positions by buying back stocks, potentially driving an overall market rally. Dusaniwsky explained that when the market hits a bottom and starts to rise again, there will likely be a significant amount of short covering. This is because the market value of shorted stocks will increase, leading to over-exposure in hedged portfolios. Short sellers, aiming to realize their market-value gains, will join other investors who are driven by market trends and the fear of missing out (FOMO) to buy stocks, thereby amplifying the upward market momentum, similar to how they exacerbated market volatility during the downturn.