Despite the recent rise in Chinese stocks listed in the U.S., short sellers are not in a rush to cover their positions. Analysts predict that if the market continues to rise, a significant amount of short covering could further boost stock prices.
Since the "924" policy changes, the China concept stocks have seen tremendous volatility. The FTSE China A50 Index Futures surged more than 8%, and the CSI 300 Index has risen over 27% from its September 13 low. Meanwhile, the NASDAQ Golden Dragon China Index soared more than 36% overnight.
According to a report from S3 Partners, short sellers have accumulated losses totaling $6.9 billion during this rally, erasing approximately $3.7 billion in gains for the year, and resulting in a current net loss of about $3.2 billion. Ihor Dusaniwsky, Managing Director of Predictive Analytics at S3, noted that short selling had slowed since the market rebound.
Huatai Securities found that the daily average short interest ratio of the Hang Seng Index fell to 10.98% last week, and further declined to 7.46% by the end of the month, a level last seen in 2010. Meanwhile, short selling of Hong Kong-listed internet stocks rose to 4.6%, while short interest in Hong Kong real estate stocks dropped to 9.4%.
The stock prices of Alibaba (BABA, Financial) and JD.com have soared, causing substantial losses for short sellers. Alibaba's stock price has risen nearly 20% in the last five days.
Short sellers betting against companies like Nio, Li Auto, Xpeng, and Pinduoduo also remain in the red. Data indicates that despite the recent uptick in Chinese stocks listed in the U.S., short sellers are still holding their positions. However, if the market continues to climb, S3 predicts that a "large-scale short covering" could further propel stock prices upward.
Dusaniwsky emphasized that Alibaba (BABA, Financial) might be the most affected if short sellers begin covering on a large scale, as short interest in the stock has increased during this rally. With short selling no longer offsetting some of the buying pressure, simultaneous short covering and additional long buying could steepen the stock's price trajectory.
