Short-term sellers fell $ 91 billion in January as GameStop leads the actions it is betting on.

Short sellers on the rope, right? It is clear that short sellers have chosen the wrong names in January. The GameStop phenomenon, in which buyers deliberately target strongly short stocks, is just the latest development in a long series of short sellers ’failures. But you still don’t count them.

Relentless markets have not been kind to short sellers for many years. Despite all the attention paid to the superstar’s short sellers, most of these managers lose money. Equity shorts lost $ 243 billion in 2020, with a negative return of 26%, according to S3 Partners.

This month, his performance is even worse. In January alone, $ 91 billion fell, according to S3.

And while traders often focus on stocks that have made money for short sellers because they are in sectors that were disadvantaged (ExxonMobil) or had accounting irregularities (Luckin Coffee and Wirecard), most shorts are unsuccessful.

In 2020, 57% of all stocks lost money in the short term. Sixty-eight percent of every dollar bet lost money.

“The biggest enemy of short sellers has not been the chat rooms of Robinhood or Reddit, it has been the Federal Reserve and the stimulus, which have raised most of the stock. It’s not a stock market, it’s a impulse market i [short sellers] they are on the wrong side of the momentum, ”Ihor Dusaniwsky of S3 Partners told me.

Given the good gains that short sellers have had, it’s no surprise that the dollar value of short stocks compared to the dollar value of the S&P 500 is at its lowest level in several years, according to Goldman Sachs.

At any given time, short sellers typically have between $ 900,000 and $ 1.3 trillion in short bets on the market, according to Dusaniwsky. This represents approximately 2% to 3% of the market capitalization of US equities.

It may seem like a small amount of money, but short sellers play a very important role. They are key to calling companies that may have questionable accounting, as was the case with Luckin Coffee and Wirecard last year.

They also provide coverage to long portfolios.

Their most important role may be as liquidity providers. They provide liquidity for the equity market and provide liquidity for derivatives traders who take the other side of options transactions.

This is where the story of GameStop comes in. “Shorts provide liquidity at the back of rallies. If you’re a long seller at the top of a rally, shorts are the only ones that buy your shares,” Dusaniwsky told me. “Shorts provide liquidity that many long ones no longer offer.”

Certainly, shorts seem to be in a difficult position. Peter Tchir, of the Securities Academy, said the shorts receive a “punch”: first, the relentless rise of the market, but then “Some traders are aggressively buying money call options. This pulls out the shorts at the moment it seems like an effective strategy “.

What will happen to the shorts? “Shorts will have to be more comfortable with losses before they are left,” Tchir told me. “And I guess call options prices will go up. Movements like [Monday] they seem crazy without re-evaluating the options. It makes me nervous. “

If the prices of call options do rise, Tchir warns that it could generate false signals in the market. “If the prices of call options go up, this could force the VIX and traders may mistakenly believe that fear is occurring. It may not be time to go down, but it may certainly be time to avoid highly volatile stocks. chat room favorites. “

Despite all the difficulties, Dusaniwsky laughs when I ask if this is a killer coup for short sellers.

It’s no coincidence, he told me, “Even though shorts are killed, new shorts come in, especially in finance and even in the names that have been most successful by blowing up short sellers.”

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