Betting Against Technology Is Finally a Profitable Trade as Short Sellers Profit $20 Billion

(Bloomberg) — Betting against technology has become a profitable trade, with short sellers pocketing billions in paper gains as growth stocks tumble.

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A historic disaster in the so-called FAANG cohort — Facebook owner Meta Platforms Inc., Apple Inc., Inc., Netflix Inc. and Google parent Alphabet Inc. — yielded $19.8 billion in market gains for bearish investors since June 30, according to data analytics firm S3 Partners.

“It’s been difficult to short for a while because a lot of liquidity has hit the market,” said Brad Lamensdorf, portfolio manager of the AdvisorShares Ranger Equity Bear ETF. “However, last year was a really great environment for us.” Lamensdorf’s fund has returned 22% this year by shorting stocks.

The unexpected has been a long time coming. Spectacular gains for tech megacaps in recent years led to paper losses of nearly $16 billion last year and nearly $20 billion in 2020 for those shorting the FAANG group, according to S3 calculations.

“The buy-the-dip mentality made shorting very difficult in the past, because even if you were right about the bad news, nobody cared,” said Bill Fleckenstein, president of Fleckenstein Capital. “People were laughing at the problems all through 2021, but that’s no longer the case.”

The tide has turned for the previously unstoppable tech giants, with the NYSE FANG+ index down 31% and poised for its first annual decline on record, according to Bloomberg data dating back to 2014. Investors are fleeing the growth stocks — based on expected earnings going forward — in anticipation of further rate hikes by the Federal Reserve and amid concerns about a recession.

Short sellers borrow stocks and sell them, hoping to buy them back at a lower price to profit from the spread. But timing is crucial. If stock prices rise, they can lose money instead — as happened in 2020 and 2021, when the NYSE FANG+ index soared.

Fleckenstein said he had stopped shorting in recent years, even though many companies were priced “absurdly,” because quantitative easing prevented deep discounts. “It’s obviously easier this year, although I haven’t been too aggressive yet as there is so much volatility,” he said.

After years of big gains on optimism about the big tech’s ability to continue its rapid growth, bets against the group have remained fairly thin. Short interest as a percentage of total shares outstanding is less than 3% across all FAANG stocks, according to S3 data.

And given the difficulty experienced already this year — with the Nasdaq 100 down about 28% — it may become harder to make money betting on further declines for the sector. There also appears to be some optimism in the first three trading days of the second half of the year, as the high-tech index adds nearly 3% over the period, with investors embracing post-disaster risk.

“The easy money came out of the short side,” said Dennis Dick, head of market structure and proprietary trader at Bright Trading. “It will be more difficult in the future.”

Technical chart of the day

Big Tech’s earnings dominance is about to take a break as only four US tech companies — Alphabet, Apple, Microsoft Corp. and Meta Platforms — expected to be among the top ten earners in the latest batch of earnings reports. That’s the lowest level in at least two years, according to data compiled by Bloomberg.

Top tech stories

  • The US is pushing the Netherlands to bar ASML Holding NV from selling to China key technology needed to make a large part of the world’s chips, expanding its campaign to curb the country’s rise, according to people familiar with the matter.

    • Shares in ASML rose in Europe amid a broader rebound in tech stocks, with analysts saying a full ban on chip tool sales in China is unlikely.

    • Washington’s latest move to restrict Beijing from encouraging its chipmaking industry is fueling Chinese semiconductor stocks, as US restrictions could boost support for domestic technology.

  • Some of Wall Street’s biggest brokerages reiterated their bullish calls on Alibaba Group Holding Ltd., suggesting more gains could be in store after the e-commerce giant rallied from a mid-March low.

  • Hong Kong is likely to see more dual-traded companies turn to main listings in the financial center as they seek to be included in trade links with mainland China, according to the city’s head of bourses.

  • TikTok’s admission that some China-based employees have access to US user data has given new ammunition to a Republican member of the Federal Communications Commission who is trying to delist the video-sharing service from major app stores.

  • Broadcom Inc.’s $61 billion deal for VMware Inc. will move forward after a rival bidder failed to emerge a deal for the cloud computing company during its so-called “go-shop” period, according to people familiar with the matter.

(Updates stock movement in paragraph 10.)

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