Capital.com, an investing platform that allows both companies and individuals to participate in financial trading, recently released its quarterly market analysis report. In their Q2 2022 Pulse report, they explored the main findings and trends that have appeared over the last financial quarter, with one of the main discoveries revealing a mass movement toward short selling.
Short selling, or shorting, where traders attempt to profit from falling asset prices, is currently at a rate of 38% across the 6 million traders that use the Capital platform. This marks a historic high, reaching the highest number of individual investors that are focusing on short-term positions since the first quarter of 2020. Even on a short-term scale, this figure is 34% higher than Q1 of 2022, demonstrating the loss in faith that many are finding with the market.
David Jones, the Chief Market Strategist at Capital.com, has commented that this trend is a reflection of the shifting investor mindset as more people see a bearish outcome within markets over the next few months. He comments that, “There has been a sharp rise in clients short-selling in E2, which shows just how significant the drop in many markets has been.”
What’s more, this trend is far from localized in a singular geographical territory. Regions like Asia, Africa, and the UK are currently leading the charge of short trading, with 41% of traders using these strategies. Even the region with the lowest proportion of investors engaging in short trading, Australia, is still at 34%, a figure considerably higher than the previous quarter.
Although behind territories such as the UK, Australia’s relative passivity when it comes to short-selling could be a reflection of their own stock market index. Unlike many indices from around the globe, the Australian ASX 200 has just begun its downturn, with the first major negative spike appearing in May - several months later than indices like the S&P 500.
Commenting directly on the lower percentage of short trades from Australian investors, Jones adds that, “Perhaps Australian clients felt somewhat insulated from the market meltdown that was underway in most other areas of the world, so have come to short-selling a little later than those in other regions.”
When looking at the profit reporting conducted by Pulse, it’s fairly easy to conclude why exactly this short-selling has become so popular, with this form of trading being more profitable (at 32.1%) than long-position trading (at 28.7%) over the period between April 1st, 2022 and June 30th, 2020.
Instead of rejecting this new trend in investing, Jones suggests that this could be a valuable opportunity for traders to add a new skill to their repertoire, “Using sensible risk control measures such as stop losses in tandem with short-selling could be a prudent addition to a trader’s overall strategy.”
Short selling indices have also been a profitable method within Q2, with the Nasdaq (US100) having a higher percentage of profits when short trading (33.7) when compared to holding long positions (32.6%). This comes from a continual strategy of 2021 that’s slowly starting to become eroded, with ‘buying the dip’ not working with the additional pressure that the NASDAQ is facing.
Commenting on this, Jones suggests that “Perhaps those traders who had been trying to buy the dip in the first quarter - and getting their fingers burnt - decided to throw in the towel and join the short sellers in the second quarter.”
The third quarter should be an interesting one for the NASDAQ as it attempted to form a base in June, which will create friction between the bulls and the bears in this coming financial quarter.
Short-Selling Has Found Its Way To Commodities
Alongside shorting of major indices around the world, both the FX and commodities markets have seen a similar trend in the widespread launch of short trades. Focusing on commodities, the oil market has been the center of attention when it comes to this trading strategy, with 41% of all oil CFD’s traded on Capital.com being shorted, as discussed by the Pulse report. This increase is staggering when compared to Q1 of 2022, which only had oil shorting at 6%.
Oil has had a tumultuous two years, having increased in price by over 500% since its lows in April 2020. Even within 2022 alone, oil rose by 70% due to Russia’s invasion of Ukraine, seeing this growth over the first three months of the year. With these increases in mind, more traders are moving to establish short positions in oil, with the expectation being that oil has to come back down eventually.
Commenting on oil, Jones suggested that “If inflation continues to pressurize the world economy, then that could further feed through to weakness in the oil price”. It seems that oil market has become overheated due to recent global events, with this high price threshold being unsustainable in the long run.
Inflation Has Also Seen the Foreign-Exchange Markets Flooding with Short Trades
Capital’s Pulse report also charted the increase in traders that are currently shorting the US dollar against other currencies. This is especially the case when looking at the currency pair of the US dollar versus the Japanese yen (USD/JPY), which is currently the leading pair in every region globally apart from the UK and Africa.
Jones continued to explain this occurrence, establishing the reasoning for the popularity of this pair being down to the Fed’s aggressive rate hike cycle that has just begun. The only factor that could drive the yen higher in the following months would be, “Any future hawkish pivot from the Bank of Japan”, as the governor of the Bank of Japan “Has remained steadfast against the tightening monetary policy as inflation is benign in Japan compared to the US.
It seems that short-selling has become commonplace across all major trading streams, with everything from indices and commodities to FX seeing its effects. These market trends are a greater reflection of the bearish perspective on markets, with the average trader now seeing the weeks on continuous red as an investment opportunity.
