Over the past three months, the percentage of traders that are short-selling indices, commodities, and FX pairs has risen, reflecting the global bearish mindset traders are currently experiencing.
The past financial quarter has seen the largest percentage of short-position trades since Q1 of 2020, according to the Q2 2022 Pulse report conducted and published by Capital.com. The amount of short-trading going on across this platform of 6 million investors is currently 34% higher than it was in Q1, with 38% of all traders on the platform using short-position trades in the previous three months.
This movement toward short trading is very much a reflection of the fact that the 2021 strategy of ‘Buy the Dip’ is no longer yielding effective results. This is, in part, due to the rapidly declining financial markets, with the context of the Russian invasion of Ukraine, the aftereffects of COVID-19, and high inflation rates causing mass market doubt across the financial sector.
David Jones, who acts as Chief Market Strategist at Capital.com, suggests that this new way of trading may come as a difficult adaptation for many traders that have been in the industry for an extended period of time, “As a general rule, self-directed traders and investors seldom short-sell. They are so used to buying first and selling later that it’s psychologically very difficult for them to come out of this way of thinking.”
Yet, even with this in mind, the Pulse report dictates that short-selling is rapidly becoming the norm, with whole regions like Asia, Africa, and the United Kingdom seeing high volumes of short trades. Jones proposes that, “There has been a sharp rise in client short-selling in Q2, which shows just how significant the drop in many markets has been. This may have forced many retail traders to change their mindset.”
The only region where short-selling isn’t as pronounced is in Australia. Yet, their main index, the Australian ASX 200, has been much more resilient than the global market as a whole, with its first decline only arriving in May, instead of much earlier in the year. With this in mind, Jones suggests that Australian users of Capital.com may have “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.”
No matter which region you focus on, short-selling has become more profitable than long-position trades over the last three months. When looking at the figure for the percentage of long-position trades that have profited this quarter, Pulse returns a rate of 28.7%, compared to the highest statistic of 32.1% of all short-position trades.
It seems that Jones attributes this movement to short-selling as a new era of trading, with those that rely on “just blindly buying the dip” now being unable to profit as much as was once the case. Instead of seeing this change as negative, he states that it could be a valuable circumstance where “using risk control measures such as stop losses in tandem with short-selling could be a prudent addition to a trader’s overall strategy.”
The Pulse report’s revelation that short-selling has become so pronounced aligns perfectly with the market downturn, with those traders brave enough to bet against the market now reaping the rewards. This is especially seen with the NASDAQ 100, which was the most traded asset for the second quarter.
Where Else Is Short-Selling Establishing Itself?
Going beyond global markets, the tendency to sell short has permeated into the foreign exchange market and commodities. Currently, traders are taking advantage of the Fed’s decision to launch an aggressive rate hike cycle to combat inflation, shorting the US dollar’s prospects against other global currencies.
This is especially seen with traders using the USD:JPY pair, with the difference in inflation rates within the USA and Japan being vastly different. With this in mind, this currency pair has quickly become the most popular pair globally, with all regions apart from the UK and Africa taking advantage of this opportunity.
Jones comments that the “Bank of Japan governor, Kuroda, has remained steadfast against tightening monetary policy as inflation is benign in Japan compared with the US.” He goes on to add that “Any future hawkish pivot from the Bank of Japan, therefore, could drive the yen higher in the coming months, and finally put some pressure on the US dollar.”
Alongside currency pairs, commodities like oil have rapidly become one of the most shorted options in the second financial quarter of 2022. In fact, oil is currently up 6% in terms of shorting since Q1, rising from 35% to 41%. This is a reflection of the growing impossibility of oil remaining as high as it currently is.
Compared to April 2020, oil is up 500%, even increasing around 70% over the first quarter of Q1. This recent hike in price is due to Russia’s invasion of Ukraine, with this invasion impeding much of international oil flow. Yet, with the growing number of people moving to short oil, it seems that people don’t believe this can go on for much longer, with more and more predicting the rapid decline of its price per barrel.