In anticipation of the lifting of short selling ban on the 1st of July 2020, we attempt to answer the question – Will the return of short sellers cause markets to falter? Based on study of 62 out of 215 short-able stocks; we think it’s highly unlikely.

For the uninitiated, there are 4 kinds of short selling in Bursa: (i) Intraday Short Selling (IDSS), (ii) Day Trading (DT), (iii) Regulated Short Selling (RSS) and, (iv) Permitted Short Selling (PSS). Most of the short volumes in Bursa are actually dominated by IDSS and DT whereas RSS and PSS only make up a fraction of the short volumes. Hence, our study revolves around IDSS and DT short sellers – the one that matters. Through our findings, there are identifiable patterns that we can observe. More often than not, key findings indicate:

1. Short sellers are not the first to trigger a sell off. The triggers are typically event driven i.e. negative news flows/poor earnings.
2. Short sellers have a higher tendency of shorting stocks which (i) are in a downtrend, (ii) have smaller market cap and (iii) have lower absolute share prices. We define a down-trending stock if their stock prices are < 200-day simple moving average
3. Typically, we see short sellers emerging in huge volumes when (i) a down-trending stock breaks down lower and continue its downtrend trajectory and (ii) when a down-trending stock or sideway-trending stock tries to break out higher.
4. This means that (i) during a sell down, short selling could exert downward momentum and possibly exacerbate the fall, and (ii) short sellers would resist share price recovery making any potential rebound take longer or require more good news to recover.
5. Occasionally, we do see short interests spike in an exponential share price rise (too high too fast scenario). We note that this phenomenon is first triggered by a seller of a long position (in large amounts), which then prompts the short sellers to join in, adding to the volatility.

Essentially, the majority of short sellers in our market are (i) technical/momentum-driven and (ii) downtrend bias. Therefore, it is safe to say that short sellers (with exception to RSS) will not short a stock just because stock prices are high or its fundamental valuations (eg. PE or PBV) are overvalued. Safe to say, short sellers would never derail an uptrend trajectory. However, we caution that short sellers could amplify a sell down (through momentum) IF long position holders unwind their position in large volumes (regardless whether the stock is in downtrend or uptrend).

Be aware of these names. In the Bursa’s universe of short-able stocks (as of 29 November 2019), we have identified 7 names which have recorded high short participation rates historically and are currently in a downtrend

(making them a prime target for short sellers). Thus, we believe the lifting of short selling restriction could subsequently cast an additional layer of selling pressure, making any potential share price recovery slightly more difficult. These counters are UMW, BAT, Sapnrg, Airasia, E&O, Armada, and Dayang.

Source: Kenanga Research - 15 Jun 2020