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XLF, the Financial Select Sector SPDR ETF, enters mid-October with its most notable development being a reversal: the short pressure that dominated the past six weeks has begun to ease, and the borrow market has opened up dramatically.
The short interest picture has changed materially since the October 7 note flagged a sustained rebuild. Shorts had climbed to 15.4% of the free float by early October, up 32% over the prior month. That build has now partially unwound. Short interest has pulled back 4.2% over the past week to 14.9% of the free float, though it remains well above September's starting point near 10%. The month-on-month reading is still up 35%, so the cumulative bearish positioning remains large. What has changed is the pace: the relentless session-by-session accumulation has stalled, and shorts trimmed positions through most of last week before a small tick back up on October 13.
The most striking development is in borrow availability, which has swung from tight to loose with unusual speed. A week ago, availability was running at roughly 158% relative to shares already borrowed, comfortable but tightening from the relaxed levels of late September. Today it has blown out to 507%, meaning there are now five shares available in the lending pool for every one currently lent out. That is a complete reversal of the squeeze dynamic flagged last week, and it coincides with the short interest dip. The 52-week tightest reading was 46.7% availability, so the current level represents the opposite end of the spectrum. Borrowing costs have also risen 38% over the past week to 0.46%, but that remains low in absolute terms and is unlikely to deter new shorts if conviction returns.
Options positioning tells a story of persistent but not extreme caution. The put/call ratio runs at 1.42, fractionally below its 20-day average of 1.44, and essentially flat with where it has been for the past three weeks. The z-score is nearly zero, which means options traders have not responded in either direction to the short interest moves. The 52-week high on the PCR was 1.98, reached earlier this year, and the current level is comfortably in the middle of the annual range. Defensiveness is baked in structurally for this fund, not spiking into a new event.
The short score has eased noticeably alongside the positioning shift. It peaked at 69.6 on October 5, its highest recent reading, and has since pulled back to 62.1 as of October 12. That decline tracks the short interest dip and the loosening of the borrow market almost perfectly. A score above 60 still flags elevated bearish activity relative to the broader universe, but the direction of travel is now clearly lower from the recent peak.
The fund itself has recovered 1.5% over the past week to $54.82, clawing back some of the 4.2% lost over the past month. On the institutional side, the most recent quarterly filings show the largest holders are concentrated in the financial sector itself: JPMorgan held 12.5% of shares as of June 30, though it trimmed by over 20 million shares in the quarter. Morgan Stanley and Goldman Sachs also cut positions. Wells Fargo and UBS Asset Management added modestly. The pattern of the fund's own underlying constituents showing up as top holders is a structural feature of financial-sector ETFs rather than a positioning signal.
The key question heading into the rest of October is whether the short interest pullback represents genuine covering or a pause before a fresh build. With availability now wide open and borrowing costs still low, the mechanics for re-establishing a large short position are frictionless. Watch whether short interest climbs back toward the early-October peak above 152 million shares, and whether the short score resumes its rise, as those two signals in combination would suggest last week's easing was a reset rather than a retreat.
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