US Contrarians: The Most Shorted Stocks

Markets in the US are rising despite soft data, as investors hope for looser monetary policy and the rotation into industrials resumes amid easing inflationary pressures.

10 Most Shorted US Stocks

1. Groupon (GRPN), 62% shorted
2. Merlin (MRLN), 60% shorted
3. SHF Holdings (SHFS), 47% shorted
4. SoundHound AI (SOUN), 41% shorted
5. Jack in the Box (JACK), 40% shorted
6. Forum Markets (FRMM), 40% shorted
7. Neuronetics (STIM), 40% shorted
8. Figma (FIG), 39% shorted
9. Arqit Quantum (ARQQ), 39% shorted
10. Recursion Pharmaceuticals (RXRX), 39% shorted

Is the Rotation Out of Tech Back?

US stocks have generally risen at the start of the third quarter after an ambiguous NFP report, with total job creation lower than expected and the unemployment rate dropping. The record high in the DJIA on Thursday (the last trading day of the week), compared with the slow progress in the Nasdaq, raised the question of whether the rotation out of tech into industrials was restarting. Semiconductors have underperformed this week amid high valuations after strong performance over the last couple of months. Investors were piling into a high-margin sector that was relatively insulated from rising energy costs. Amid relatively little news about the situation with Iran, as traffic through the Strait of Hormuz has been steadily increasing, crude prices have been below pre-war levels for a week now. With the rising costs of memory chips and processors, investors are now more worried about computing costs than about energy costs. That could leave tech on the back foot ahead of earnings season, which will give investors a chance to see whether companies' profits have kept pace with their share prices.

Cooling labour markets could see inflation pressures diminish later in the year, but markets are still pricing in an around 80% chance that the Fed will hike by December. Higher rates and slower earnings could be the catalyst for a market correction in the summer after the extensive surge, as the Middle East conflict wound down. Some stocks could be particularly vulnerable, as major investors pre-position with large short-buying. However, some of them could pop if they are subjected to a short squeeze. A quick look over the stocks that have accumulated the most short interest recently shows a broad base. Nevertheless, there is a notable number of AI-related firms, suggesting that investors are looking at the sector for stocks that might flop in the near future. Here's what's behind some of the large interest in shorting certain stocks:

Recent IPOs Under Pressure

A company that was recently listed: the price surged above the IPO price but then fell back. Does not generate a profit yet. AI-based, focused on self-landing craft. Sound familiar? If traders are interested in the future of SpaceX, looking at other tech companies' performance might offer clues, including Merlin. The autonomous flight company has attracted short-seller interest as it slowly advances toward completing a deal with the US military, seen as key to the company's potential. If tests prove unsuccessful, the company might struggle or have to seek new capital, which could depress its share price. Figma is another fairly recent IPO with a large short position, as it still has an IPO lockup overhang and is in the difficult SaaS sector amid investor fears of AI disruption.

Groupon: From Short Squeeze to AI

Earlier in the year, there was a lot of speculation that the online vouchers company would be subject to a short squeeze. And it still has one of the highest levels of short interest in the market. But the company has been making an effort to prove the bears wrong and recently took extensive restructuring measures to pivot towards AI. However, the road to recovery might be long and bumpy after the company's earnings were worse than expected. The company announced layoffs and raised its guidance by cutting costs rather than pursuing organic growth. Q2 earnings could be an opportunity for investors to take a closer look under the hood to see whether these changes will actually put the company on the road to recovery.