The Most And Least Heavily Shorted Sectors Of The Market

| About: Energy Select (XLE)

US equity markets have rallied significantly since the election on November 8th. While the large-cap, market-cap weighted S&P 500 is up roughly 3 percentage points, the average stock in the S&P 1500 - which contains large-caps, mid-caps, and small-caps - is up 10% since Trump's victory.

Areas of the market with heavy short interest typically do well when the market is in rally mode, so we thought it was a good time to provide some updated short interest analysis (Click here to see our list of the five most shorted stocks in each sector).

The chart below highlights the average stock's short interest as a percentage of float (SIPF) within each sector of the S&P 1500. As shown, the average stock in the broad index has 6.3% of its float sold short. By far, the most heavily shorted sector remains Energy, where the average stock has 10.3% of its float sold short. In 2014 and 2015, as Energy stocks tanked, short interest levels trended higher and higher. But this year, Energy stocks have bounced back significantly, and the shorts have gotten crushed. If Energy shares continue higher, we'll likely see this reading dip under 10% pretty soon.

The next most shorted sector is Consumer Discretionary, where the average stock has 9.4% of its float shorted. This is a sector that has seen a massive rally since the election, so the shorts in this sector have taken a beating. Healthcare ranks third at 7.4%, followed by Telecom at 6.7%. Healthcare didn't always have high short interest, but it has been creeping up recently as the sector has declined.

In our view, the most notable sector in the chart is Technology. Technology is generally viewed as the most speculative sector of the market, but as shown below, the average stock in the sector has only 5% of its float sold short. That's the third lowest SIPF level for any sector behind only Real Estate and Utilities. We think this shows that investors might be a little too complacent about Tech right now, especially given the run it has had over the last eight years. Should Tech start to run out of steam, there are a lot of shares out there for bears to borrow right now!