The tug-of-war between bulls and bears persist with the three-day market rally coming to an abrupt halt today.
The S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) reversed all of its morning gains to close down 5.3% on Friday.
It’s never easy knowing when to buy beaten down stocks in a fast moving bear market but you can glean some useful hints by looking at what short-sellers are doing.
For those unfamiliar with the term, short-sellers are traders who borrow stock to sell on-market. It’s a bearish bet on a stock as the aim is to buy back the stock at a lower price later to profit from the difference.
Short-sellers tend to be more sophisticated than most retail investors. This doesn’t mean they get it right most of the time, but there’s little doubt short-sellers are making a killing in this coronavirus-rocked market.
What’s notable is that these bears are increasing their attack on a number of notable ASX shares over the week ended 23 March, according to the latest data from ASIC which is always a week old.
The one that stood out for me is the Afterpay Ltd (ASX: APT) share price. Short-interest in the stock jumped by a significant 1.37 percentage points over the week to 4.85% of total shares on issue. Short-interest is the percentage of shares in a company that is short-sold.
This could explain the incredible surge in the Afterpay share price over the last few days. The stock jumped from a low of $8.90 on Monday to $18.52 today.
The surge may be more to do with short-covering than investors jumping on what they consider to be a bargain buy. Short-covering refers to short-sellers buying the stock to lock in profits.
Short-covering vs. real buyers
If the jump in the Afterpay share price is due to short-covering, then the rebound is unlikely to be sustainable. We should get a better sense of this in about a week’s time.
I like the longer-term fundamentals of Afterpay, but I don’t think now is the time to be buying the stock. Unemployment is set to surge in Australia and in the US. The buy now-pay later company is heavily exposed to both markets.
Short-sellers cashing in
Another notable ASX stock to see a big jump in short-interest is outdoor advertising group oOh!Media Ltd (ASX: OML).
Short-interest in the stock increased 1.2 percentage points to 8.46% over the week to Monday, just when the stock went into a voluntary suspension in order to raise capital.
It was a well-timed move by short-sellers. The OML share price crashed 28% to 60.5 cents today when it resumed trading.
In the money
Taking about trading suspensions, short-sellers must have also smelt one coming for Flight Centre Travel Group Ltd (ASX: FLT). The travel agent took the brunt of the COVID-19 pandemic sell-off and short-interest rose 0.76 percentage points to 7.2% in the week to 23 March when Flight Centre went into a trading halt.
The company has since cancelled its dividend and is desperately looking for emergency capital to keep its lights on.
Short-sellers are likely to be on another winning trade with this one.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended oOh!Media Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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