Short-Selling More Profitable in Q2 of 2022, According to The Pulse Report

Short-Selling

The recently released Q2 Pulse Report details how short-position trading was 32% more profitable this quarter, with oil, USD:JPY, and major indices being favored by those shorting.

After a tumultuous three months, Capital.com’s latest quarterly Pulse report has revealed a large-scale investor change in mindset, with more traders than ever moving toward short-selling across indices, FX, and commodities. The report, collecting data on Capital.com’s 6 million individual traders, revealed that short-position trades have increased from 4% in Q1 to 38% in Q2. This shift marks the highest number of short sellers since the first quarter of 2020.

Short trading – where traders can actively profit from a falling asset price – has become incredibly popular due to the major downturn within the financial markets as a whole. Contextualized against the aftereffects of the pandemic, rising inflation, cost of living increases, and Russia’s invasion of Ukraine, a large percentage of traders are taking a bearish approach to the market.

One of the main areas that have been impacted has been indices, with the NASDAQ 100 facing huge pressure over this second financial quarter. While long positions within the US100 profited at an average of 32.6%, those focusing on shorts have seen higher profit margins of 33.7%.

The Chief Market Strategist at Capital.com, David Jones, comments on the shift within the NASDAQ 100, suggesting that while “Buying the dips was a very profitable strategy through much of 2021 – it has been, of course, a different story with the NASDAQ 100 under pressure for much of the year so far.” He continues, discussing the short peak in March, which failed to continue, as “The index lost 22% in the second quarter.”

Theorizing on the sudden increase of short-traders within these indices, Jones continues, “Perhaps those traders who had been trying to buy the dip in the first quarter decided to throw in the towel and join the short sellers in the second quarter.”

Commodities and FX Have Also Seen A Higher Percentage of Shorting

Alongside indices and the mass movement toward shorting the falling markets, both foreign exchange and commodity trading has experienced a considerable shift into short-trading. Two central leaders of these trading types, oil for commodities, and the USD:JPY pair for FX, are the result of major global events over recent months.

The first of these, oil, has actually risen in price by over 500% since its low of April 2020, even increasing 70% in the first three months of 2022. This was majorly due to the Russian invasion of Ukraine, with the pressure on this market causing oil to skyrocket in price.

Currently, we’re seeing a huge shift toward shorting oil, with 41% of all oil CFD traded on Capital.com being shorted in Q2, compared to only 6% in Q1. This movement is reflective of the common belief that crude oil rates will drop over the next three months, with this commodity having reached its benchmark figure.

The effects of another global event that has led to a rise in shorting is seen within the FX market. Due to the Fed’s aggressive rate hike cycle to combat inflation, traders around the globe are shorting the US dollar’s prospects against other major currencies. This is especially seen against the Japanese yen, where inflation is practically non-existent at around 2.5%.

The currency pair of USD:JPY is currently the leading global pair in every region, excluding Africa and the United Kingdom.

The Bearish Mindset Prevails

With short-selling becoming popularized across almost every trading stream, the Pulse report is a reflection of the general market sentiment at this moment. While 2020 and much of 2021 were bullish years for the market overall, 2022 does not have the same trajectory.

Jones comments on the mindset shift in Q2, pinpointing these changes as a result of the industry’s movement toward being more bearish as a whole. He comments that “Our findings show there has been a sharp rise in client short-selling in Q2, which shows just how significant the drop in many markets has been.”

Short-selling has become a global initiative in this financial quarter, reaching proportions of 41% in the UK, Asia, and Africa. The only region that is seeing less short-selling is Australia, which comes in at 34%.

Commenting on this, Jones adds that he attributes Australia’s resilience to the fact that “The Australia ASX 200 index only started falling in May – it has been volatile but broadly sideways for much of the year since then. Perhaps Australian clients felt somewhat insulated from the market meltdown that was underway in most other countries of the world, so have come to short selling a little later.”

Ultimately, short-selling is currently the more profitable strategy, with 32.1% of traders profiting when shorting while only 28.7% of traders do the same when establishing long-position trades.

Jones sees this the movement to short-trading as a simple fact of attempting to preserve profits, with “The ability to sell-short could well have an impact on traders’ overall profit and loss.” He sees that short-selling is a reflection of the “prolonged weakness in markets, where investors stop being rewarded for just blindly buying the dip.”

As the markets continue to look bearish for Q3, we’ll see just how much further individual investors take the short-selling strategy.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.