MW Shares of heavily shorted stocks have been on a tear lately. Consider this before buying into the rally.

By Joseph Adinolfi

Stocks with large short interest tend to struggle over the long run, even if they do see brief periods of outperformance from time to time

Shares of heavily shorted stocks have been on a tear lately.

Across the board, stocks have performed pretty well since April 8, when the S&P 500 logged its 52-week closing low as markets convulsed in response to President Donald Trump's April 2 "liberation day" tariff announcement. But shares of companies with a high short interest have tallied particularly large gains, on par with market darlings like Nvidia Corp. (NVDA).

The FTSE Russell index of the most-shorted stocks in the U.S. is up by more than 70% since the April low, Refinitiv data show. Over the same period, Nvidia has gained more than 80%.

Both have dramatically outperformed the S&P 500's SPX roughly 30% comeback.

To be sure, anybody betting against shares of meme stocks like Opendoor Technologies Inc. $(OPEN.UK)$ has probably taken it on the chin recently, even as Opendoor and other members of the latest wave of meme stocks appear to have come off the boil this week.

But anybody interested in buying in now should probably take this into consideration: Over time, investors have made more money betting against stocks like Opendoor than betting on them, according to an analysis from Deutsche Bank. According to FactSet data, short interest in Opendoor recently stood at more than 20% of its public float.

Deutsche Bank found that a basket of heavily shorted stocks - those in the top decile, based on the percentage of their public float held short - has underperformed the Russell 3000 RUA by 6.2% annually since 1985. The short basked constructed by Deutsche Bank assigned an equal weighting to each member and was rebalanced monthly.

Along the way, there have been a few instances where high-short-interest names have outperformed. But historically, these episodes have been quite rare and relatively short-lived.

As the tech bubble deflated in 2000 and 2001, Deutsche Bank's short basket outperformed by 19 percentage points. During a period that straddled 2013 and 2014, the basket outperformed by 9 percentage points. And most dramatically, during the pandemic-era retail-trading boom, the basket bested the Russell 3000 by a whopping 142 percentage points.

The latest episode, which began in April, has seen the biggest outperformance since the pandemic period, with the short basket outperforming by 39 percentage points, according to Deutsche Bank's numbers.

Some have argued that the strong performance of these heavily shorted names, most of which have a spotty or nonexistent track record of profitability, is a sign that markets are looking dangerously frothy these days. But while exuberance has definitely seeped back into markets, Deutsche Bank doesn't see much reason to worry, at least not yet.

Demand for call options, which has proven to be a reliable counter-indicator in the past, has yet to reach extreme levels, the Deutsche Bank team pointed out, which should allay some fears about an imminent reversal.

Deutsche Bank's Binky Chadha and Parag Thatte have shown that positioning in stocks has only recently returned to overweight levels, after months of languishing in underweight territory. These data suggest positioning has plenty of room to grow before the alarm bells start ringing.

Still, the strong performance of heavily shorted stocks, along with the recent rise in margin debt, is something investors should probably keep an eye on, even though Deutsche Bank strategists are seeing only a slight overweight at the index level.

-Joseph Adinolfi

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July 31, 2025 15:39 ET (19:39 GMT)

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