Short sellers are starting to bet against America’s economy

By Paul R. La Monica, CNN Business

It’s looking awful gloomy out there on Wall Street.

Traders are making big bets against retailers as recession fears gain steam. Investors are growing more skeptical of energy stocks following the spike in oil prices, according to S&P Global Market Intelligence. And investors are souring on health care as interest rates start to rise.

Short sellers are beginning to bet on a slowing economy — and against a number of industries that have fared well recently. Here’s where short interest is creeping higher.

Consumer stocks

Bearish investors are shunning consumer stocks in part because they worry that surging prices will eventually lead to an economic slowdown, perhaps even a recession.

“Consumer discretionary remained the most-shorted sector in mid-March, largely due to the impact of rising inflation on demand for nonessential goods,” according to S&P.

Short interest levels — the percentage of shares being held by investors betting that a stock will go down — rose to 5.24% for consumer discretionary stocks. That’s the highest level since mid-January 2021.

Retailers Big 5 Sporting Goods, Citi Trends and Camping World Holdings were among the most heavily shorted consumer stocks as of mid-March, according to S&P. So were electric vehicle makers Arcimoto and Workhorse Group.

Oil stocks

Investors aren’t nervous only about consumers. They also seem to think that skyrocketing prices of oil will soon subside, which could hurt profits and stock price momentum for energy companies. Shares of Chevron, for example, are up nearly 40% this year, making them the best performer in the Dow.

“Short interest in the energy sector, which has taken off on bets that historically high oil prices were unlikely to last, climbed to 3.91% in mid-March, its highest level since mid-October 2020,” S&P added.

S&P didn’t list specific energy companies that short sellers are circling. But oil equipment and drilling firms Transocean, Nabors and Helmerich and Payne all had a high level of short interest, according to an analysis of companies that CNN Business conducted using stock screening tools from Refinitiv.

So did oil and gas companies such as new Warren Buffett/Berkshire Hathaway favorite Occidental Petroleum, EQT, Southwestern Energy and Chesapeake.

Still, some wonder if investors betting against oil will find themselves getting hurt if the Russia-Ukraine conflict doesn’t end anytime soon.

“Oil prices will certainly continue their journey to the north making the oil companies more profitable in the coming quarters,” said Ipek Ozkardeskaya, senior analyst with Swissquote, in a recent report.

“The rising short bets also means a rising risk of a short squeeze, where investors who have bet for the prices to fall decide to close their positions — and closing a short position involves buying back the stock,” she added, noting that short squeezes have pushed meme stocks like GameStop and AMC sharply higher since the start of 2021.

Health care stocks

Health care stocks are also being targeted by gloomy investors. The sector has benefited as a result of the Covid-19 pandemic, but as more people get vaccinated, boosted and have access to new pills that can treat coronavirus patients, health care companies may become less attractive.

Many investors have flocked to health care stocks because they feel the industry is a safe, defensive bet if the economy slows. But health care stocks may also lose some allure among conservative investors looking for solid dividend yields at a time when interest rate hikes from the Federal Reserve are likely to make long-term Treasury bonds more attractive.

Diagnostics firms Quest and PerkinElmer, drug company Jazz Pharmaceuticals and medical equipment maker Tandem Diabetes were among the most heavily shorted health care stocks, according to Refinitiv.

Banks get left out

Interestingly, bank stocks are not being ambushed by short sellers. It seems like investors are hoping that more rate hikes will lift loan profitability for the financial sector. According to S&P’s data, the financial services sector had the smallest increase in short interest through mid-March.

“Financials were the least shorted sector, likely due to bets that the banking sector will benefit from multiple rate hikes from the Federal Reserve this year and next,” S&P said.

According to futures that track interest rate projections, traders are pricing in a more than 80% chance that short-term rates will be at least 2.5% to 2.75% by the end of 2022. That’s up from the current level of 0.25% to 0.5%.

Big banks will start reporting their first quarter results next week. JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley are all due to release earnings the week of April 11.

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