XLE is up 2.7% on the week and nearly 9% over the past month, yet short sellers are still adding — a tension that has now been running for two consecutive weeks.
Last week's note flagged a deliberate short rebuild into the rally. That pattern has continued, but with one meaningful change: the borrow market is no longer tightening. Short interest edged up another 2.1% on the week to 58.3 million shares, holding near 19.4% of the free float — the same elevated level reported last Tuesday. The build is real but it has slowed. More tellingly, availability has loosened rather than compressed. It sat near 93% a week ago; it has moved back to 96% as of Tuesday, well above the tightest readings seen in June when availability dropped to 25-35%. Cost to borrow has done the opposite of what a tightening borrow market would imply — it has fallen 32% on the week to just 0.39%, its lowest level in the 30-day window and down more than 57% from a month ago. Together, those two moves suggest the lending pool is opening up, not closing down. Shorts are adding shares, but finding them easier — not harder — to source. That's a different setup from the squeeze-adjacent conditions seen through much of June.
Options traders are more cautious than usual, though not at extremes. The put/call ratio is running at 1.50, above its 20-day average of 1.43 and about one standard deviation elevated — a mild hedge tilt rather than a panic signal. Notably, the PCR was running far higher through early-to-mid June, regularly above 1.55 and touching 1.68, so the current reading actually represents a relaxation of defensive positioning relative to a month ago. The ORTEX short score is firm at 61.1, up about two and a half points from the lows seen in early July, consistent with the sustained short interest level. Analyst data is stale and omitted.
Institutional flows from Q1 filings show Goldman Sachs and Morgan Stanley as the two largest disclosed holders at 5.4% and 5.3% of shares respectively, both adding materially in the March quarter — Goldman by nearly 10 million shares. JPMorgan and Citigroup also added. Bank of America trimmed by 5.5 million shares, and Wells Fargo reduced slightly. The buyer-dominated picture among large banks is worth noting against the backdrop of persistent short interest: institutional allocators were increasing energy exposure while the short base was also building, a two-sided market that has continued into July.
What to watch next is whether short interest continues to creep higher even as the borrow market loosens — if availability stays wide and cost to borrow keeps falling while short interest still rises, that points to an orderly, conviction-driven short rather than a borrow-constrained squeeze dynamic. The other variable is oil itself: last week's note pointed to crude pushing toward $85, and whether that momentum holds will determine whether the rally gives shorts more reason to add or finally forces a covering wave.
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