VOO - SPX: A Generational Shorting Opportunity

2024-05-30 18:22:37 ET

Summary

• Shorting stocks has historically been a losing strategy, but current conditions resemble those that occurred at the 2000 bubble peak and gave rise to 125% gains for short sellers.
• With cash now yielding far in excess of the S&P500 dividend yield short sellers now get paid handsomely for betting against the market.
• Even a mild rise in the equity risk premium from near zero currently could result in significant capital gains for short sellers.

Shorting the S&P500 has proven to be a disastrous strategy over the long term, with a long position in the daily inverse S&P500 index having lost 92% of its value since 2009. It is no surprise therefore that short interest on US stocks has crashed to multiyear lows. However, there have been periods when short selling the market has been highly profitable and another such period may be upon us. From the 2000 market peak to the 2009 trough, short positions gained 125%, thanks to the combined impact of high yields on cash relative to the equity dividend yield, and falling valuations, which more than outweighed the impact of rising earnings and dividends....

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