New York (CNN) — The most popular trade on Wall Street for the past couple of years has been a simple one: Buy Big Tech and ride the AI wave.
But a more contrarian (and risky) strategy is making a comeback: short selling, or betting that a stock will go down.
Shorts are a niche and oft-maligned class of investors, though the hate is often undeserved. Their skepticism helps keep market hype in check, often exposing companies whose valuations have become untethered from fundamentals, and in theory they can help deflate destructive financial bubbles before they get out of hand.
A bull market, such as the AI rally of the past several years, is a short-seller’s nightmare. Lately, though, the highly concentrated, tech-centric momentum trade has put more investors on edge. And shorting — borrowing a stock to sell it high in the hopes of repurchasing it at a cheaper price later and pocketing the proceeds — is having a bit of a renaissance.
Short positions across US and Canadian equities surged 4% in June to $2.39 trillion, a record in data going back to 2010, according to market data firm S3 Partners. The increase was driven entirely by new short selling — about $98 billion of additional shares shorted, said Sam Pierson, S3’s director of research.
Short interest for the median S&P 500 stock has surged to 3.2% of market capitalization, the highest level since the 2008 financial crisis, Goldman Sachs researchers wrote in June.
Put simply: That means investors are preparing for some kind of pullback. The increase was “pretty broad,” across sectors Pierson added, noting some sectors, such as health care, saw a general increase in both long and short positioning.
It’s hard to pin down how much of the recent shorting surge is active — investors targeting particular companies or sectors — and how much is part of a broad risk management strategy at the index level. But, Pierson said, “shorter-term trends are more likely to reflect active/directional shorts.”
That dynamic is particularly visible in shares of SpaceX, which have shed $1 trillion in market value since the company debuted last month as the biggest initial public offering in history. Bearish investors have piled in: According to S3 data, more than 30% of the company’s publicly available shares have been sold short — that’s extremely high, even for a business owned by Elon Musk, a perennial short-seller target.
The surge in short interest coincides with a decidedly bearish sentiment creeping into what had been a relentlessly bullish AI trade. Buzzy semiconductor stocks that surged earlier this year have struggled to maintain their momentum, with the popular iShares Semiconductor index falling nearly 20% from its early-June peak. And investors are increasingly nervous about when and whether the mind-boggling sums being spent by Big Tech on data centers will ever generate returns.
The war in Iran is compounding those fears. On Thursday, international crude oil prices surged above $100 as tensions escalated between the US and Iran, rattling stock and bond traders alike. The S&P 500 fell 1.4% in the morning, while the tech-heavy Nasdaq fell 2% and the Dow Jones Industrial Average traded 1% lower. The 10-year US Treasury yield rose 4.71% — its highest level since January 2025.
“It’s not that people are all of a sudden saying, ‘OK, I want to short stocks again,’ ” said Gordon L. Johnson, founder of GLJ Research, an advisory firm known for sniffing out overvalued stocks for investors to bet against. “Right now, people are saying, ‘I’m looking for protection.’”
For Johnson and other bearish investors, it’s not hard to see why.
“Everybody is levered to the gills, all the indicators are flashing overvalue. We have super high inflation, we have a Fed chair who may actually try to fight inflation, and you have people questioning the AI thesis for the first time in three years,” Johnson said.
And that’s a signal for regular retail investors and passive retirement savers, too: The party in your 401(k) could be winding down.
A quieter corner of Wall Street
When you buy a stock, you have a defined loss (however much you paid for it) and an unlimited potential gain. Buy low, sell high, as the mantra goes.
In shorting, it’s the other way around.
Let’s say Company A’s shares are worth $100 on the public market today. But you’ve done some research and think the stock is bound to fall. So you don’t buy the stock at $100 — you borrow it from someone for a small fee, with the promise to return the stock later. You sell the borrowed stock for the current market price of $100. By the time you have to return the stock to the lender, it only costs $50 and you end up with $50 in profit, minus some fees.
Because Company A’s stock can only ever go to zero, your potential upside is limited. But if the stock keeps trading higher, your losses can theoretically go on forever.
“If you’re holding a short position, you better have done your homework,” Steve Sosnick, chief strategist at Interactive Brokers, said. “People who invest from the short side do not do so in a cavalier manner. They can’t afford to.”
And even if you’ve got the facts right, you can still lose mightily if you can’t break through the clamor of the bull market. Earlier this month, President Donald Trump took a moment to highlight a booming stock market by calling out the plight of short sellers.
“Those poor bastards, I mean, they are in big trouble…I never like short guys because they’re betting against the country.”
Trump isn’t alone. While shorting is a common way for firms to hedge their bets, business leaders tend to loathe activist shorts — the folks who target a company by name, bet against it and trash-talk it in the financial press.
Those loudmouth shorts are increasingly rare. The number of short-focused hedge funds dwindled from 54 in 2008 to just six in the first quarter of this year, according to industry research firm HFR.
One by one, prominent practitioners have thrown in the towel:
- Jim Chanos, known for his bearish bets against Enron and Tesla, shut down his hedge fund in 2023, saying the business model had come under pressure.
- Bill Ackman, who famously lost $1 billion on his multiyear crusade against Herbalife, declared in 2022 he was retiring from such campaigns.
- The founder of Hindenburg Research shuttered his short-selling firm more than a year ago.
- Fahmi Quadir, whose string of successful short campaigns earned her the nickname “the assassin,” closed her hedge fund last year and is redirecting her activist energy toward finding hidden gems in the South Korean market, according to the Wall Street Journal.
- And just last month, a federal jury convicted Andrew Left, founder of Citron Research and one of Wall Street’s most aggressive short sellers, of securities fraud, claiming he misled investors and exploited his media influence to profit from brief price movements. (Left, who pleaded not guilty, said he would appeal and decried what he sees as a chilling effect on traders who give “honest opinions and trade at the same time.”)
‘Close to as good as it gets’
The recent surge in short activity doesn’t necessarily mean a crash is around the corner, but it does suggest more investors are questioning the sustainability of the heavily concentrated AI rally that has propped up the entire market for nearly four years.
“The lost art of short selling has come back, and it’s absolutely critical,” hedge fund manager Dan Loeb declared earlier this year, according to Bloomberg.
Timing the market is notoriously tricky, of course, and there’s no telling when, or how severely the AI trade could sour, if it ever does. But take it from Jamie Dimon, the CEO of JPMorgan Chase, who told analysts after his bank’s record quarterly profit haul last week, thanks in part to the AI-fueled rally: “It’s getting close to as good as it gets.”
The loudmouth shorts that Corporate America loves to hate are likely to stay on the sidelines a while longer – nobody likes the guy at the party complaining the music is too loud.
But when the party does wind down, Johnson of GLJ Research said, expect the swashbuckling shorts to come out swinging.
“For now, for activist short sellers, it’s extremely risky,” Johnson said. But I think if the market crashes, I think they will come back with a vengeance.”
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