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.
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.
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Brendon Lau owns shares of Webjet Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Electro Optic Systems Holdings Limited, Pointsbet Holdings Ltd, and ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited and Pointsbet Holdings 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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