This year is predicted to be the best year for the S&P 500 since 2013, thanks to Facebook, Apple, Amazon, Netflix and Google (also known as FAANG). But there has been an increase of short sellers. These are traders who borrow shares and then sell them hoping the shares become cheaper in the meantime. In that case they can buy them back for less money and keep the difference as their profit.
Investors added the most notional amount of short interest to the FAANG stocks which put them at the top of the S&P 500 list (calculated from January through December 27, 2017). According to analytics firm ‘S3 Partners’ all the FAANG stocks were also part of the top 10 companies with the highest short interest. With an increase of 55% for Facebook, 55% for Netflix, 48% for Apple and 36% for Google. This was calculated as of December 27, 2017.
The increase in numbers might just the reason why some stock traders are predicting that in 2018 these stocks will make a change for the worse. “We continue to like technology, despite its substantial outperformance in 2017, but we see the performance driven more by non-FANG stocks,” said Tom Lee, the cofounder of Fundstrat.
One of the reasons of Lee’s prediction is that because of the popularity of the FAANG stocks it now has an expensive price-to-earnings ratio that’s near 46. But also the fact that internet service providers will be able to charge their customers for services like Netflix and YouTube. “It’s ultimately a shift in cost sharing – as those networks sending downstream traffic (to end users) need to potentially compensate telecom/cable networks for traffic imbalances,” Lee explained.