Short-sellers are upping their bearish bets against a number of ASX stocks as we head into the reporting season.
This may provide insights to the S&P/ASX 200 Index (Index:^AXJO) that may release disappointing news when their release their profit results.
Short-sellers tend to be more sophisticated than retail investors, so it can pay to keep an eye on what they are doing, particularly ahead of a market inflection point.
What is short-selling
For those who are unsure what short-selling is, it's where a trader borrows a stock to sell on market with the hope of buying it back at a lower price later. This allows the trader, or short-seller, to profit from the difference.
ASIC puts out daily updates on the stocks that are being short-sold, but the data is always a week behind.
The part of ASIC's report I find more interesting is not stocks that are most shorted at any given time, but the change in the short position (called short-interest). This tells me which are the new ASX targets being stalked by short-sellers.
Biggest increase in shorts before the reporting season
The stock that's saw the biggest increase in short-interest since the start of July is the KIRKLAND/IDR UNRESTR (ASX: KLA) share price.
The Canadian-based gold miner didn't have any of its stock short-sold up until two weeks ago. Now the percentage of its ASX shares that are in the hands of short-sellers stand at 10.29%.
How short-sellers are playing the BNPL sector
The second most targeted stock is the Zip Co Ltd (ASX: Z1P) share price. The BNPL star saw the proportion of its stock being shorted jump by 245 basis points (2.45 percentage points) to 7.67%.
That's a big increase in shorts and comes as short-interest in its bigger rival, the Afterpay Ltd (ASX: APT) share price, fell 58 basis points to just 0.87%.
This may indicate that short-sellers are anticipating good results from Afterpay and are using Zip Co as a hedge. It's a popular trading strategy to go long (meaning buy) on the strongest stock in a sector and short its weaker rivals.
Other favourite short-selling targets
The stock that saw the third biggest increase in shorts this month is the Electro Optic Systems Hldg Ltd (ASX: EOS) share price.
Short-interest in the weapon systems company jumped 221 basis points to 3.98% this month, although total short-interest in EOS is still relatively low.
Other notable stocks that are attracting short-sellers include the Pointsbet Holdings Ltd (ASX: PBH) share price and Webjet Limited (ASX: WEB) share price.
Some brokers believe the Pointsbet share price has overshot on the upside, while the rolling COVID-19 shutdown of parts of Australia will clip Webjet's wings.
