Early April’s sharp swoon in technology stocks should have been good news for short sellers, who borrow shares and sell them, hoping to buy them back at a lower price. It wasn’t. The Nasdaq 100-stock index, dominated by computer and Internet companies, fell 3.1 percent on April 10, its worst one-day drop since November 2011, and declined 7.5 percent from March 4 through April 11. The tumble came as short interest, the percentage of a company’s shares that investors have borrowed and sold, was close to zero at many of the biggest names in the index.
Burned by rising stock prices, bearish investors have cut their wagers against computer and software makers by more than half in the past five years. Short interest on technology companies in the Standard & Poor’s 500-stock index is averaging 2.4 percent, near the lowest level since at least 2006, according to data compiled by Bloomberg and Markit, a London-based provider of financial data. That’s down from 5.6 percent at the stock market’s low point in March 2009. “Most people told me they’re scared to death to short,” says John Thompson, chief investment officer at hedge fund Vilas Capital Management, which is betting on declines in Facebook (FB) and Netflix’s (NFLX) stocks. “They’re acting on fear instead of logic.”
Bears may have been discouraged by the market’s quick recoveries from recent dips. The Nasdaq 100 declined 5.2 percent from Jan. 22 to Feb. 3, and last year slipped 3.4 percent from Oct. 2 to Oct. 9 and 6 percent from May 17 through June 24. Each time, the index climbed above its previous high within a month of reaching the low. “You have to defer to the strength that’s pushing the stocks higher,” says David Pavan, a portfolio manager at ClariVest Asset Management. Short sellers “just pulled back, and there was no appetite to keep stepping in front of it.”
Facebook dropped as much as 21 percent during the March-April selloff, but bets against it accounted for less than 0.1 percent of the shares outstanding. Its short interest peaked at 15.2 percent in August 2012, just before the stock began a 306 percent advance over the next 18 months. Netflix’s short interest has fallen to 1 percent from 23 percent in November 2012. After surging almost 300 percent in 2013, shares of the online movie provider have plunged 28 percent from a March peak. Baidu (BIDU), a Chinese Internet-search company, slumped 22 percent during the month through April 7, while short interest has fallen to 0.1 percent from a peak of 3.9 percent in July.
For Whitney Tilson, managing partner of hedge fund Kase Capital Management, the ups and downs of Netflix have been an education. Tilson says he started shorting the stock in 2010, in the expectation that its streaming service wouldn’t succeed. “As the stock almost doubled against me, I reevaluated the business and realized that customers were much more satisfied with the service than I anticipated,” he says. He closed out his short bet and “felt very good about it” when the stock then soared to $300. “Then I watched it go to $53 and felt very foolish because everything I predicted came true.” By that point, having “developed an appreciation of how good their business was,” he says he began buying the stock, at an average price of $58 a share. He still holds Netflix shares, which closed at $326 on April 15.
The lack of short sellers may make it harder for stocks to rebound from the latest setback, according to Rick Bensignor, head of trading strategy at Wells Fargo Securities (WFC). In the past year, rallies have picked up speed as bears decided to close out their bets by buying back stock they’d borrowed and sold, a process known as short covering. The scarcity of short sellers means there are fewer eager buyers when stocks fall. “You have a one-sided market,” Bensignor says. “It’s much easier for the market to decline.”
That would be fine with the remaining short sellers. Tilson says his firm is shorting 3D-printing companies now. “That’s a pretty good example of foolish, speculative, overvalued, momentum-driven stocks,” he says. Uri Landesman, president of Platinum Partners, says, “I’m a huge bear on the technology stocks and on the market. If you’ve got patience and you’ve got the pocket, shorting a whole basket of these very-high-multiple stocks is a very smart thing to do.”