Short-sellers are again at the short end

Short-sellers have hoped that a tighter US monetary policy would pull back equity shares, but to no avail. Why is a long view the better option for now?

- Maarten Mittner

The latest signals from the US Federal Reserve have reassured equity markets that the central bank will not act rashly with its tapering objectives.

Disappointing US job creation numbers has resulted in further caution, while the Delta variant of the coronavirus could cause further disruption over the Northern winter.

The Fed’s message was that monthly bond purchases may be reduced at year-end, but it will be gradual and must not be seen as indicative of any imminent hiking of interest rates. Large tech companies’ stocks surged on the development, presenting another blow to short-sellers, who hoped that a tighter monetary policy would pull back equity shares, mostly Big Tech, from their present highs.

Apple reached new heights, increasing its market cap to $2.6tr, while Microsoft, Amazon and Tesla all gained ground on the pronouncements from Fed chair Jerome Powell.

Short-selling is a way of making money when stocks appear to be overvalued and could be due for a downward correction. Some analysts regard Tesla as way too expensive, as its intrinsic value is calculated at about $150 per share. But it is now trading at upwards of $700. Should it dip and fall to a value more closely correlated with its intrinsic value, short-sellers are set to make big money by buying shares at cheaper levels, like buying a house at R1m that previously cost R5m.