Short sellers’ retreat a good sign for the Australian sharemarket, Morgans says

Woolworths remains the most shorted stock on the ASX by value, Morgans says. Photo: Dallas Kilponen Short selling has retreated since the start of the year as the market fell 7 per cent and shed $100 billion Photo: Morgans

Investors betting against further falls in Australian shares after a horror start to the year have trimmed their bets, meaning they don’t expect things to get worse from here, stockbroking firm Morgans says.

Short positions have dramatically pulled back since the start of the year, as the market shed 7 per cent or $100 billion in value in a little over a week.

“Short selling has changed course from its strong ascent in 2015, signalling a possible reversal in the heavy skew in negative investor sentiment up to the end of the year,” Morgans equity strategy analyst Andrew Tang said.

Short selling is the practice of selling a borrowed security at a higher price before buying it back at a lower price, pocketing the difference.

Stocks with a “significant” reduction in their short positions outnumber those increasing positions by 2:1, meaning investors don’t envisage the ASX to fall much further below the 5000 mark, Mr Tang said.

Woolworths remains the most shorted stock by value, with $2.8 billion in bets against its shares.

The embattled supermarket chain, which issued three profit warnings and lost its chief executive and chairman in 2015  makes up 10 per cent of total short positions on the S&P/ASX 200, while making up just 2.4 per cent of the index by market capitalisation.

“Although an admired name with strong brand equity, we think with structural industry change currently underway, the turnaround strategy without a CEO at the helm will take years and not months to implement,” Mr Tang said.

“We continue to advocate trimming overweight positions in favour of some of our high conviction stocks such as Sydney Airport, which offers earnings certainty without the negative structural risk.”

The top 20 most shortest stocks on the ASX 200, calculated as a percentage of their free floating shares, include Flight Centre, at 25 per cent. JB Hi-Fi has 20 per cent tied up by short sellers, despite the expectations that its Christmas sales were strong based on data from the Australian Bureau of Statistics.

“Similarly, Harvey Norman also saw a rise in short positions over the month.”

“Resources stocks also some some increased selling over the month [of December],” Mr Tang said.

Those short positions, including 15 per cent in Fortescue Metals Group and 16 per cent in Whitehaven Coal come amid a savage commodity rout deepened by concerns over China’s economy amid its sharemarket and currency turmoil.

Oil prices are the worst hit, having dropped 20 per cent this year alone, with Brent crude buying just $US30.80 a barrel on Wednesday.

For the ASX, while market short interest is around 50 per cent higher now than at the same time in 2014 and 2013, Mr Tang said 2016 looked poised to be an improvement on 2015, where the market ended 2.1 per cent lower.

“We think 2016 will shape up to be better than 2015 but volatility will be a constant reminder that stock selection and vigilance will be required,” he said.

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