A contrarian strategy is making a comeback on Wall Street: 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.

Short Selling on the Rise

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.

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. This suggests that investors are preparing for some kind of pullback.

Reasons for the Surge

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.

Investors are increasingly nervous about when and whether the mind-boggling sums being spent by Big Tech on data centers will ever generate returns. As Gordon L. Johnson, founder of GLJ Research, an advisory firm known for sniffing out overvalued stocks for investors to bet against, said, “It’s not that people are all of a sudden saying, ‘OK, I want to short stocks again,’ ” but rather, “Right now, people are saying, ‘I’m looking for protection.'”

Original reporting: KRDO (Colorado Springs metro) — read the source article.