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Profitable September Stock Selloff Generates $50 Billion for Short Sellers

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Short Sellers Reap $50 Billion Profit from September Stock Selloff

Traders who bet against megacap technology stocks emerged as winners as the September selloff erased previous gains in the group. Short sellers saw paper profits of $50 billion last month as the S&P 500 Index experienced a 4.9% decline, according to data from S3 Partners LLC. This marked the best month of the year for contrarian traders. The rally in megacap tech, driven by artificial intelligence hype, began to fade as investors digested the Federal Reserve's decision to keep interest rates higher for longer to combat inflation, which acted as a headwind for equities. Apple Inc., Nvidia Corp., Amazon.com Inc., and Tesla Inc. were among the most profitable short trades for the month, collectively generating nearly $5 billion in paper profits. Short sellers took advantage of the broader stock market slump and allocated less capital to unprofitable positions during the month. Over 80% of every dollar shorted in September yielded a positive return. However, not all short bets were successful, with energy stocks like Exxon Mobil Corp., Chevron Corp., and Valero Energy Corp. ending up as the biggest losers due to the energy sector's gains driven by rising oil prices. Looking ahead to the fourth quarter, short sellers may continue to cover their positions by repurchasing borrowed stock to secure profits. If the broader market reverses direction, stocks that experienced an increase in short selling and significant profits in September are likely to witness further short covering. This suggests that the tech giants known as the Magnificent 7 could be subject to more short covering in the near future.

Hot Take: Implications of the September Stock Selloff for New Businesses

The September stock selloff, which saw short sellers reaping a massive $50 billion in profits, offers crucial insights for new businesses, particularly those in the tech sector. The selloff, triggered by the Federal Reserve's decision to maintain higher interest rates, underscores the volatility of the market and the potential risks associated with over-reliance on specific sectors, such as megacap tech stocks. Companies like Apple, Nvidia, Amazon, and Tesla, despite their strong market presence, were not immune to this downturn. This serves as a reminder that even established businesses can face significant challenges in a fluctuating market. For new businesses, this highlights the importance of diversification and the need for robust risk management strategies. However, the selloff also presents opportunities. The fact that over 80% of every dollar shorted in September yielded a positive return indicates that strategic investments and contrarian approaches can be profitable, even in a declining market. As we move into the fourth quarter, businesses should be prepared for potential market reversals and further short covering. The potential for more short covering among the tech giants, known as the Magnificent 7, could lead to market fluctuations that new businesses must be ready to navigate.
Story First Published at: https://financialpost.com/pmn/business-pmn/september-stock-selloff-minted-short-sellers-50-billion-profit
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