XLB — the Materials Select Sector SPDR — heads into mid-May with a split personality: short sellers have been aggressively reducing positions even as the borrow market tightens back to its most extreme level of the past year.
The most striking feature of the past six weeks is the scale of short covering. Short interest peaked at roughly 20 million shares in early April, when tariff fears hammered cyclicals and materials stocks bore the brunt. By May 12 that figure had dropped to 13.1 million shares — about 22.8% of the free float — a fall of nearly a third in just five weeks. The month-on-month decline runs at 33%. That's not cautious repositioning; that's an organised retreat. The ETF has responded in kind, adding 1.2% over the past week to close at $52.14, recouping most of the ground lost in the tariff-driven selloff.
Yet the lending market is sending a sharply different message. Availability has collapsed to its tightest point all year — every share in the lending pool is currently lent out, with utilisation hitting 100% on May 12 for the first time since the market dislocation of April 7-9. The cost to borrow has jumped to 0.97% APR, up 35% on the week and 58% over the past month. That's still a low absolute level — this is an ETF, not a small-cap squeeze candidate — but the direction of travel is notable. Fewer shares to borrow, rising borrowing costs, and a short book that remains nearly a quarter of the float: the residual short position is increasingly expensive to hold and increasingly difficult to build further.
Options positioning is almost precisely neutral, offering little additional signal this week. The put/call ratio runs at 0.72, fractionally below its 20-day average of 0.74 — a z-score of minus 0.1, essentially zero. The most telling comparison is with early April, when the PCR ran above 1.20 for nearly two weeks as investors scrambled for downside protection. That defensive hedging has been almost entirely unwound, suggesting the options market no longer prices a near-term crash scenario for materials. The 52-week PCR high of 8.82 is a reminder of just how extreme that panic was.
The broader ETF sector flow data confirms materials is running against the tide of institutional money. Over the past month, materials-focused funds bled roughly $1 billion in net outflows, making it one of only four GICS sectors in negative territory. Information Technology dominated inflows by an enormous margin. That macro context matters for XLB: even as individual short sellers cover, the passive and active allocation picture suggests institutional buyers are not rushing back to the sector. The short score of 61.8 — which has held in a range of 61-64 for the past two weeks — reflects that ambiguity. It's an elevated reading, but it has not moved materially higher or lower as the covering has played out.
Analyst data is stale and should not be relied upon. Institutional holders are a roster of prime brokers and market-makers — Morgan Stanley, Goldman Sachs, Susquehanna — rather than fundamental long-side conviction buyers, which is typical for a sector ETF used heavily as a hedging vehicle. Susquehanna's position more than doubled in the most recent filing period, adding over 3 million shares, consistent with increased ETF arbitrage or options-related hedging activity rather than a directional bet on materials.
What to watch: whether the lending pool loosens as covering continues — or whether the remaining short base, trapped in an increasingly expensive borrow with availability at zero, faces renewed pressure to exit positions in a thinner market.
See the live data behind this article on ORTEX.
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