Short Sellers Scored This Month With Regional Bank Stocks

There is no denying that the stock market can be unforgiving.

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In the last few days, short sellers have made billions of dollars in profit by betting against regional banks, causing more pain for investors.

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S3 Partners managing director Ihor Dusaniwsky wrote in a Tuesday report that short sales in the sector have increased over the last seven days. Among his firm's activities is tracking the market for short sales.

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By shorting stocks, short sellers bet the price will drop so they can buy them back at a lower price. The difference between the borrowed shares and the returned shares is pocketed by them.

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Due to bets against regional banks, short sellers have made $3.5 billion in mark-to-market profit this month, according to Dusaniwsky. If short sellers choose to close out their positions, they can still realize gains using mark-to-market figures.

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These five banks were the most active in short sales over the past week: PNC Financial Services,  Huntington Bancshares HBAN, Citizens Financial, Fifth Third Bancorp, and Valley National Bancorp.

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There has been an average decline of 17% in those five stocks over the past five days.

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Stock prices of some banks have declined, so short sellers have reduced their bets. There have been a number of reductions in the business, particularly at  M&T Bank; Webster Financial; Associated Banc; First Citizens Bancshares; and Signature Bank, which has gone bankrupt.

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Despite short sellers buying to reduce their positions, shares of the four remaining banks have declined an average of 16% over the past five days.

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In March, short sellers made most of their profits when KRE dropped more than 23% between March 8 and Monday. On Wednesday, the ETF lost another 3% as a result of negative news about Credit Suisse, which is not in the index. Late morning trading saw its shares fall almost 17%. Over the past five days, Credit Suisse stock has declined by about 24%.

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In morning trading Wednesday, S&P 500 SPX –1.67% and Dow Jones Industrial AverageDJIA –1.90% were down 1.4% and 1.5%, respectively.

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Long-term investors are not typically short sellers. Short selling is a bad idea since most stocks tend to increase over time. The majority of short sales trades are not long-term investments, which explains why short sellers need to be agile.

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A sector whose gyrations are already making investors queasy will become even more volatile as short sellers cover positions and target other lenders.