XLF - Short Selling Of Financial Stocks Nearing All-Time Highs

2023-03-16 08:20:00 ET

Summary

• We use buying in ProShare short ETFs as proxies for measuring actual short selling by investors.
• The ratio of the money buying the two ProShare financial short ETFs versus the long financial ETF is 4.24 and rapidly approaching last year's all-time high.
• While not a decider on whether to buy the financial sector, data on investor sentiment should probably be used in at least the timing of the decision.

The ProShares fund family provides insight into the thinking of the short seller. They have over 41 funds that short various market sectors and major stock indicators. By measuring how much buying is occurring in these short funds compared to purchases in long funds, one can achieve a quantitative assessment of their actions. We use these ratios like the odd-lot short selling ratios of the past.

We just wrote about it in this article . With the sudden appearance of the financial crisis, we thought it might be worthwhile to look at how much buying is going into the short financial ETFs. But first, a brief explanation.

Using ProShares Buying As Market Indicators

If you have time, I encourage you to read the previous article, but if you are short on time, I'll give a quick summary here.

The chart below graphs the ratio of buying in 41 ProShares short funds to buying in 60 ProShares long funds since 2011. It's plotted against SPY as a reference for the market. The pink zone represents more buying in long funds than short funds, while the green zone represents more buying in the short funds.

As you can see, most of the time more money goes into long funds than short funds. But at critical market lows, represented by the green arrows, the ratio shows more money going into short funds than long funds. This is opposite of what one would want. This makes the ratio a great indicator of contrary opinion, similar to the odd-lot short selling ratios of the past.

We did a similar calculation using three ProShares Financial ETFs.

Buying in ProShares Financial Short Funds

This red line graphs the ratio of buying in the two ProShares short financial funds ( SKF and SEF ) to their long fund ( UYG ). The calculation is done over seven trading days, which makes it a short-term measure of changes in investor sentiment. We need a calculation that changes over a short period of time because of the sudden nature of the current crisis.

We've indicated with black arrows moments when high amounts of money were going into the financial short funds than the long fund. With one exception, the high ratios corresponded to price lows in the State Street Financial Select Sector SPDR ETF ( XLF ). As of yesterday, the ratio was 4.24.

While the current ratio is not quite as high as it reached last year at key market lows, it could get there in a day or two under current market conditions.

Opinion

We think investors should apply economic metrics to determine whether to invest in any sector and in the financial one. As far as the timing of such an investment, we think the current level of buying in the short financial ETFs is indicating that, from past history, we are rapidly approaching a critical moment but are not there yet.

If this crisis intensifies, we'll make an attempt to update this short selling metric in another article.

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