XLC Shorts Retreat as Options Hedging Unwinds

XLC, the Communication Services Select Sector SPDR ETF, is telling a different story this week: the short rebuild flagged in the previous note has reversed, with covering outpacing the ETF's own modest recovery.

Short interest dropped 13% over the past week to roughly 5.9 million shares, or 2.6% of free float. That partially unwinds the spike to 6.48 million shares reported last week, which itself had been a re-escalation after an earlier round of covering. The month-on-month picture is still up 24%, so the net positioning over October has been more bearish than September, but the near-term direction has flipped back to covering. The borrow market confirms there is nothing forcing that covering. Cost to borrow has fallen 16% on the week to just under 0.50%, half what it was a month ago. Availability is generous at 320%, meaning more than three shares remain in the lending pool for every share currently borrowed. That is a loosening from last week's already-comfortable levels, and it makes new short positions easy to establish or exit without friction.

The more interesting development this week is in options. Defensive positioning has unwound sharply. The put/call ratio has dropped to 1.04, nearly two standard deviations below its 20-day average of 1.33. That is a material shift: through most of October the ratio sat persistently above 1.35, reflecting steady demand for downside protection. The move to 1.04 is the lowest reading in at least a month and places the ETF close to its 52-week low for the ratio at 0.74. Options traders have stepped back from hedging at the same time as short sellers are covering, two independent signals pointing in the same direction.

The price backdrop complicates the picture slightly. XLC bounced 1.2% on Tuesday but is still down 2.1% on the week and 8% over the past month, closing at $101.44. The ORTEX short score edged up to 40.9, its highest reading in the data, though the move from 35 to 41 over the past two weeks is a gradual drift rather than a sharp re-rating. Valuation multiples are as of September quarter-end, with the fund trading at roughly 19 times earnings and just under three times book, both of which drifted modestly higher over the past 30 days alongside the broader de-rating in communication services names.

The setup heading into next week is an ETF that has fallen hard over the past month, where short sellers are pulling back and options traders have unwound their defensive hedges, even as the price itself has not recovered meaningfully. Whether that reflects genuine conviction that the selloff is done, or simply a pause before the next leg, is what the price action over the coming sessions will begin to answer.