XLY, the Consumer Discretionary Select Sector SPDR ETF, has spent the week reversing the short rebuild flagged in the previous note — and the speed of that reversal is the story.
The bears that pushed short interest back toward 10.5 million shares on May 19 have been steadily giving ground. From that local peak, short interest has declined roughly 5% to just under 9.93 million shares, landing at 10.1% of free float. That is still well above the mid-April trough near 12.4 million shares in reverse — context matters here — but the one-month picture is unambiguous: shorts have shed about 22% of their position since late April. The ORTEX short score has tracked the same arc, easing from 54.4 on May 19 to 50.8 today, sitting almost exactly at the midpoint of its range. Neither crowded nor cleared.
The borrow market has loosened considerably, and that shift contradicts the defensive tone implied by the short rebuild narrative. Availability has climbed back to 171% — more than double where it was a week ago when it was running below 80% — meaning the lending pool now holds nearly 13 million shares available against roughly 9.9 million already borrowed. Cost to borrow has barely moved, hovering around 0.55% APR, essentially unchanged on the week. Cheap, plentiful borrow does not describe an environment where a squeeze is imminent or where shorts face meaningful pressure to close. The mechanics of the position, at least, remain comfortable for anyone holding it.
Options positioning tells a different story — and the divergence is worth naming explicitly. Defensive hedging has jumped to its most elevated reading in weeks. The put/call ratio reached 3.13 on Tuesday, roughly 2.6 standard deviations above its 20-day average of 2.79. That is the most stretched defensive reading in the recent sample, and it arrived on the same day the ETF posted a 3.8% weekly gain to $119.45. Traders who rode the rally appear to be paying up for downside protection at the same time shorts are covering. Two groups, moving in opposite directions, using different instruments.
The institutional picture offers one additional data point worth noting. As of the most recent 13-F window at end of March, the largest flows within the top holders were not uniform. Morgan Stanley added roughly 760,000 shares and UBS Asset Management added close to 1.9 million, while Goldman Sachs trimmed nearly 950,000 and Columbia Management cut over 1.2 million. That split — large buyers alongside large sellers — mirrors the ambivalence visible in the short and options data. There is no clean directional signal from the ownership base.
The week's setup leaves XLY in an unusual position: shorts are covering, the price is up nearly 4%, borrow has loosened sharply — all of which reads as a constructive unwind — yet options traders are the most defensive they have been in recent weeks. What to watch is whether the put/call ratio normalises as the price holds, or whether fresh hedging demand persists at elevated levels while short interest continues its descent.
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