Second-quarter earnings of billions of dollars! The bullish trend in the US stock market does not hinder the steady profits of short sellers

According to the Zhitong Finance and Economics APP, in the second quarter of this year, short sellers in the US stock market made substantial profits. Despite the overall market continuing to rise, they successfully shorted some US stock targets.

According to data from S3 Partners LLC, shorts made $10 billion in profits in the second quarter. Ihor Dusaniwsky, Managing Director of S3's Predictive Analytics department, stated that profits in sectors such as industrial, healthcare, and finance offset the mark-to-market losses of $15.7 billion in the technology sector.

"This quarter, their stock selection was really outstanding," Dusaniwsky said, pointing out that companies like IBM (IBM.US) and Cloudflare (NET.US) had stable trading performance but experienced price declines in the second quarter.

Short sellers' ability to profit in a rising market indicates that investors are flocking to a few large tech stocks amid uncertain macroeconomic conditions, while some areas in other industries are weak.

In the quarter ending on June 28, the S&P 500 index rose by 3.9%, with NVIDIA (NVDA.US) rising nearly 37%, and the tech-heavy Nasdaq 100 index rising by 7.8% during the same period.

Quincy Krosby, Chief Global Strategist at LPL Financial, said, "The market is too narrow, that has always been a saying. People are increasingly of the view that the time of these stocks rising alone is passing."

Evidence suggests that short sellers are investing in industries that rose in the second quarter. S3's data shows that these contrarian traders put $33 billion into the information technology sector. As the prices of these sectors rose, they heavily shorted Google's parent company Alphabet (GOOGL.US), Meta Platforms (META.US), and Netflix (NFLX.US).

These traders also actively increased their bets on underperforming industries, including financials, consumer staples, and consumer discretionary. Tesla (TSLA.US) is an exception - despite most shorts heavily shorting the consumer discretionary sector, these shorts exited trades by covering or buying back stocks, amounting to $2.2 billion, causing Tesla to drop from first place in the most shorted stocks ranking in 2023 to fourth place this year.

Meanwhile, the energy sector saw the most short covering in the second quarter.

Dusaniwsky attributes the success of short sellers to considering market momentum more when deciding how to trade"The market liquidity is almost more important than the company's fundamentals," he said. "We see more long and short positions entering the market than ever before."

Of course, this momentum could quickly change, Krosby warned, as a transition period is approaching. The second-quarter financial reports are about to be released, and any unexpected news from tech giants could quickly lead to a drop in stock prices. The Federal Reserve and when they will cut interest rates are also variables to consider. In this context, Krosby said, "You have to be very cautious."