Stocks Under Heavy Short-Selling Attack Rise Instead, as Short Covering Sends Prices Soaring [fn Market Watch]

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[Financial News] Stocks that short sellers have recently bet heavily against are instead rising sharply, widening paper losses for short-selling investors. They had expected prices to fall and entered short positions, but as shares climbed instead, they rushed to buy back stock to limit losses. That short covering, in turn, has further amplified the gains.
According to the financial investment industry on the 22nd, all 11 listed companies whose short-selling trading ratio, or short-selling volume divided by total trading volume, exceeded 20% from the 1st to the 21st of this month saw their share prices rise. Short selling involves borrowing shares, selling them first, and then buying them back at a lower price if the stock falls. If the price rises instead, losses widen. When shares move against their expectations, short sellers often repurchase them to reduce losses, and that short covering can itself push prices even higher.
A representative case is HD Hyundai Heavy Industries. So far this month, 2.67 million shares have been sold short. The short-selling trading ratio reached 34.9%. Yet the stock jumped from 454,000 won on April 1 to 576,000 won on the 21st. Compared with the average short-selling price of 469,158 won, the stock is up more than 20%. For short sellers, losses have grown rapidly as the share price moved far above their average selling price.
At first, the market expected overhang concerns to emerge after HDKSOE disclosed plans on the 31st of last month to issue an exchangeable bond using its stake in its subsidiary HD Hyundai Heavy Industries. The stock did undergo a short-term correction on the 1st and 2nd of this month. But expectations for an improved shipbuilding cycle, combined with supply-demand factors, helped the stock rebound quickly. Analysts say the possibility of short covering also added to the upward momentum.
HANMI Semiconductor Co., Ltd. showed a similar pattern. Over the past 20 trading days, its short-selling trading ratio reached 32%, but the stock climbed to a level 7.51% above the average short-selling price of 274,372 won. Hanjin KAL Corporation also posted a short-selling trading ratio of 37.25%, yet its share price rose 6.16% from the average short-selling price of 112,087 won. The higher the short-selling share, the more sharply the stocks rose against expectations, creating a classic case of mounting short-covering pressure.
A similar scene is also visible among large-cap stocks with the biggest market capitalizations. Samsung Electronics Co., Ltd. and SK hynix Inc. have relatively low short-selling ratios of around 4% to 5%, but their share prices have risen sharply above the average short-selling prices this month, increasing the potential losses for short sellers. Samsung Electronics closed at 219,000 won on the 21st, 11.62% above the average short-selling price of 196,194 won. SK hynix closed at 1,224,000 won, 23.22% above the average short-selling price of 993,288 won. With both stocks posting steep gains, the burden on short sellers appears to have grown accordingly.
Market participants say a paradoxical situation can emerge during a sharp rally in the KOSPI Composite Index, where short selling ends up adding to upward pressure. One investment industry official said, "When a stock with a large buildup of short positions rises instead of falling, delayed short covering can come in as investors try to cut losses, and the price can climb faster and more sharply than expected." The official added, "Such supply-demand factors are a significant part of the recent surge in some stocks."
In fact, the KOSPI Composite Index stood at around 5,478.7 at the beginning of this month on a closing basis, but it ended at 6,388.47 on the 21st, setting a new all-time high.
khj91@fnnews.com Kim Hyun-jung Reporter