Short Selling of S&P 500 Drops to Lowest Level Since February

By Lynn Thomasson

Aug. 12 (Bloomberg) -- Wagers against the Standard & Poor’s 500 Index fell to the lowest level since February as investors shorted fewer shares of financial stocks.

Short interest on the S&P 500 declined to 8.77 billion shares as of July 31, a 12 percent decrease from two weeks earlier, according to data compiled by U.S. exchanges and Bloomberg yesterday. That’s the steepest drop since Sept. 30. Investors reduced bearish bets on financial stocks the most, slashing them by 31 percent to 2.05 billion shares.

Better-than-estimated profit reports and economic data have sent the S&P 500 to a 47 percent rally since March 9, causing losses for investors who sold borrowed stock in the hope of buying it back later at a lower price. There were fewer bets against 9 of the 10 main industries in the S&P 500 during the two weeks that ended July 31, the broadest decline this year.

“People don’t want to get in front of a market that’s going the other way,” said Michael Cuggino, who helps oversee $4.1 billion at Pacific Heights Asset Management LLC in San Francisco. “I view it as a potentially contrarian indicator in that if you have, on a macro level, more people betting that stocks are going to go up, maybe you should start thinking the other way.”

Citigroup Inc. shares sold short fell 72 percent to 343.3 million, the steepest decrease of any S&P 500 company. Traders closing out an arbitrage bet involving the U.S. government’s exchange of preferred stock for common equity may have driven reduction.

Banks, brokerages and insurers are still the most shorted industry, even after financial institutions in the S&P 500 surged 126 percent in five months.

Intel Corp. and Red Hat Inc. had the biggest increases in short interest. At Intel, the world’s biggest computer-chip maker, it surged 65 percent to 131.4 million shares. For Red Hat, the largest seller of the Linux operating system, it jumped 66 percent to 9.17 million shares.

U.S. stock exchanges release data on short selling every two weeks.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.