XLE short sellers stabilise as the ETF extends its recovery

XLE has continued to grind higher, adding another 1.1% on the week to close at $67.97, but the more interesting development is what's happening in the lending market: the short-cover wave that defined the past fortnight has slowed, and positioning is settling into a new equilibrium.

The retreat of shorts documented in the October 14 note has effectively run its course. Short interest is largely unchanged on the week, edging up just 1.4% to 57.6 million shares, still 19.2% of free float. That compares with the October 1 peak of roughly 68.7 million shares, so the bulk of the unwind is already in the price. What has changed is the lending backdrop. Availability has loosened considerably, now at 91.8% versus 52.7% a week ago, meaning there is nearly as much supply of shares to borrow as there are shares already borrowed. Cost to borrow has dropped to 0.43%, down 26% on the week and more than 60% below its early-October level. The borrow market is no longer under any meaningful stress. Shorts who remain in the position are doing so cheaply and comfortably.

Options positioning reinforces the picture of a structurally cautious but not alarmed market. The put/call ratio is running at 1.64, almost exactly in line with its 20-day average of 1.66, with a z-score near zero. This ETF historically carries a heavy put overhang, the 52-week high on the PCR was above 112, so the current level is unremarkable. There is no sign of fresh defensive hedging piling in, but there is also no meaningful shift toward calls that would suggest conviction in a further rally.

The ORTEX short score adds a note of consistency. At 61.5, it has barely moved over the past two weeks, drifting between 61.4 and 64.1 since October 7. That range suggests the short thesis is not intensifying but is not being abandoned either. Roughly one in five free-float shares remains borrowed against the fund, a level that still qualifies as elevated for an ETF of this size and liquidity. Two Sigma entered as a new holder through June, adding nearly 5.8 million shares, while Goldman trimmed by close to 14.9 million over the same period, a split among large institutional names that mirrors the ambivalence in the short data.

The analyst data for XLE is stale by more than a decade and carries no weight here. What matters more for an energy sector ETF is the macro backdrop. A previous note flagged that XOM and CVX face headwinds from slowing global growth and softer oil prices. With borrow conditions now loose and short interest no longer falling quickly, the next signal to watch is whether shorts begin rebuilding positions if crude weakens further, or whether the reduced cost to carry encourages them to hold existing positions rather than close them.