It has been a torrid time for short sellers since March 2020 lows. For almost 2 years, stocks and commodities have risen relentlessly. S&P has risen more than 100% during this time, lifting many boats in many markets. Many short positions have been decimated during this time, given the pervasive buy-the-dip mentality. Will shorting be profitable in 2022?
Shorting is far less popular than the traditional “longing” of stocks, commodities and other asset classes. The key reason is that losses from shorting can be theoretically infinite, while losses from longing can be at most 100% (given no use of margin/leverage). There is another reason – longing stocks/bonds will generate persistent income over time while shorting will actually cost money to sustain. Thus shorting has to be more precise, as short positions may cost too much to be held for a sustained period.
However, shorting can be an extremely profitable technique when it is successful. Stock and other asset prices in general tend to fall faster than they rise. Also, given that there are fewer traders shorting compared to longing, shortists would be competing with less people in the shorting game.
In much of 2020 and 2021, short trades have been crushed. However, with high valuations and impending policy shifts, would 2022 be a more fruitful year for short sellers? I personally believe so, but do be careful, as nothing is 100% certain in the markets, and shorting is more complex than longing, so do trade with care!