AI concerns rise, US stock short positions hit record high.

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Short positions in US stocks are reaching the highest levels on record, reflecting investors' deep concerns over whether the recent rally can be sustained. The S&P 500 fell 1.6% last week, rebounding 18% since the end of March.

According to data from S3 Partners LLC going back to 2010, short interest in S&P 500 constituent stocks has reached nearly 3.79% of shares outstanding, approaching historic highs; the short interest ratio for Russell 3000 constituents has risen to 6.3%, setting a new record.

Meanwhile, the short interest ratio for NYSE-listed stocks has continued to climb since February this year, reaching 9% of shares outstanding in late June—also a record high. This figure far exceeds the 5% during the 2008 global financial crisis and the roughly 6% peak during the COVID-19 pandemic.

The surge in short positions, combined with uncertainty over AI-related spending, has made the market’s outlook for the second half of the year increasingly divided. Joseph Saluzzi, partner and co-head of equity trading at Themis Trading LLC, said:

"Concerns about AI spending and wild swings in the semiconductor sector are fueling investor skepticism. For the remainder of this month, earnings season and geopolitical factors will be key variables."

Short positions hit record highs, but bulls still dominate

Ihor Dusaniwsky, head of predictive analytics at S3 Partners, noted that "short selling activities are increasing, and the breadth of targets being shorted is also expanding." However, despite record-high short bets, the overall market has not come under significant pressure as a result.

According to S3 Partners data, investors have about twice as much invested in long positions as in short positions, meaning even though the scale of shorts is large, their impact is largely offset by long hedges.

Brian Reynolds, chief market strategist at Reynolds Strategy LLC, believes that high levels of short positions are likely being offset by continued investor buying, with the two forces essentially balancing each other out and causing the market to trade sideways over the past month: "This has digested some speculative excess and may pave the way for the next move higher."

In a report to clients published Thursday, Reynolds said:

"We still believe retail investors will continue to push the stock market to new highs, and should the market pull back, corporate stock buybacks will accelerate, helping the market recover from lows."

Meanwhile, hedge funds are moving in the opposite direction from the overall trend. According to data compiled by Goldman Sachs, hedge funds have recently been covering US stock shorts at the fastest pace in three months—conspicuously diverging from the overall accumulation of short positions.

Heavily shorted stocks underperform, SpaceX shorts make nearly $5 billion in book profits

Although, on average, short bets have not been profitable so far this year, some heavily shorted stocks have delivered substantial returns for short sellers.

According to Bespoke Investment Group, the group of Russell 3000 stocks with the highest short interest—such as Hertz Global, Eos Energy Enterprises, Once Upon a Farm, and Dave & Buster's Entertainment—are down an average of 15% so far this year, while the rest of the index is up nearly 21% on average. The Russell 3000 index is up 9.3% year-to-date.

Among them, Hertz is one of the most prominent shorting successes this year. The car rental company’s stock has fallen 65% year-to-date, with about 79% of its shares outstanding shorted—arguably the most representative “short-selling success story” this year.

A similar divergence is playing out among large-cap stocks. The S&P 500 is up 9.3% so far this year, but in dollar terms, the most heavily shorted targets include the "magnificent seven" technology stocks as well as chipmakers like Micron Technology and Broadcom.

S3 data also shows that among the most shorted stocks by proportion of shares outstanding, SpaceX stands out—in the week before last Friday’s price plunge, short bets against the company reached $25 billion, accounting for nearly 29% of its shares outstanding. Year-to-date, short sellers have accumulated about $4.8 billion in paper profits, up nearly 28%.

AI investment return worries remain a core market risk

Joseph Saluzzi, co-head of equity trading and partner at Themis Trading, said:

"Rising short interest indicates that investor concerns are heating up."

He pointed out that the market’s growing doubts about AI capital expenditures and the sharp gains in the semiconductor sector persist, even as overall market panic remains under control.

Saluzzi believes that for the remainder of this month, earnings season performance and geopolitical situations will be two key factors affecting the market's trajectory.

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