XLY, the Consumer Discretionary Select Sector SPDR ETF, enters June with shorts at a crossroads — a brief rebuilding phase over the past week has already begun to stall, echoing the failed attempt flagged in the previous note.
The week's central tension is familiar but worth revisiting. Short interest nudged 1.8% higher on the week to just under 10 million shares, landing at 10.1% of free float. But that headline move obscures the direction of travel: shorts peaked at roughly 10.4 million shares on May 28, and have been retreating since. Over the past month the picture is unambiguous — bears have shed nearly 12% of their position from the late-April peak above 12 million shares. The ORTEX short score has drifted modestly higher this week, reaching 52.7, but remains squarely in neutral territory. The rebuild is happening, but it is not gaining conviction.
The borrow market tells a similar story of easing rather than tightening. Availability has tightened meaningfully this week — dropping from 204% last Thursday to 129% — meaning the ratio of shares-still-available-to-borrow relative to shares-already-borrowed has narrowed. That said, 129% still represents a reasonably comfortable borrow environment, far above the 52-week low of 27%. Cost to borrow has actually fallen sharply, dropping 28% on the week to just 0.40% annualised. That is near the softest level of the past month. Shorts are picking up the pace of borrowing, but the market is not making them pay for it — the lending pool is still accommodating demand without friction.
Options positioning remains structurally defensive but is cooling slightly. The put/call ratio runs at 2.71, still substantially elevated in absolute terms, but fractionally below its 20-day mean of 2.80. The z-score of -0.71 signals that options traders are marginally less hedged than their own recent average — a small but notable shift away from peak defensiveness. For an ETF that saw its PCR spike as high as 42 during the past 52-week range (likely a liquidity-driven outlier), the current reading reflects persistent caution among discretionary sector participants without the panic of prior episodes.
Institutional flow from the most recent quarterly snapshot adds texture to the setup. The most notable move was Morgan Stanley adding roughly 760,000 shares in the March quarter, while Goldman Sachs trimmed its position by nearly 950,000 shares and Columbia Management cut by over 1.2 million. UBS Asset Management was the most aggressive builder, adding nearly 1.9 million shares. The net picture is mixed — large institutions redistributing rather than making a unified directional call on consumer discretionary exposure. JPMorgan and Barclays were also modest sellers, while Wells Fargo added. No single dominant conviction is visible in the 13F data.
The price action frames the whole picture cleanly. XLY has lost 0.5% in the past session and 1.6% over the week, closing at $117.59. That gentle drift lower is consistent with the short rebuild, but the pace of short covering in recent sessions — and the falling cost to borrow — suggests the bears are not pressing their case aggressively. The next test is whether the bears regain conviction to push short interest back above May's local peak near 10.5 million shares, or whether the one-month covering trend reasserts itself and the rebuild stalls for a second consecutive time.
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