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September sell-off generates US$50 billion for short sellers

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2023-10-04

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Short sellers who had bet against megacap technology stocks emerged as winners in September as a selloff in the sector unfolded. According to data from S3 Partners LLC, short sellers raked in an impressive $US50 billion ($79.3 billion) in paper profits last month, marking it as the most lucrative month for contrarian traders this year.

The September slump saw the S&P 500 Index shed 4.9 percent, providing short sellers with an opportunity to capitalise on the decline in tech giants' stock prices. This turnaround in fortunes for short sellers was particularly significant as it reversed previous gains made by these stocks.

The hype around artificial intelligence had been propelling megacap tech stocks for a considerable period. However, the tide began to turn in September as investors took into account the Federal Reserve's commitment to keeping interest rates higher for a prolonged period to combat inflation, which acted as a headwind for equities.

Among the companies that proved to be the most profitable for short sellers last month were Apple Inc., Nvidia Corp., Amazon.com Inc., and Tesla Inc. Collectively, these four companies generated nearly $5 billion in paper profits for short sellers.

Ihor Dusaniwsky, Managing Director of Predictive Analytics at S3, commented on the situation, stating, "The increased short selling in September coupled with long side selling drove down stock prices during the month, but if markets rebound in the fourth quarter, we may see a spurt of short covering in some of the most profitable names as short sellers look to realise mark-to-market profits."

This unexpected success for short sellers serves as a reminder of the volatility and unpredictability of financial markets. As the year progresses, market participants will be closely monitoring whether the fourth quarter brings about a rebound in tech stocks and if short sellers choose to cover their positions in pursuit of realised profits.

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