When the coronavirus pandemic hit in March last year and sent shockwaves into the investor market, no one would have expected to be in a bull market less than a year later. But following the U.S. government’s aggressive attempts to protect the economy, investors have been getting progressively more optimistic. The S&P 500 index is up more than 70% from the initial March crater, while the Russell 3000 index is up more than 78%.

The market has not been kind to short sellers in the past year, with less sophisticated investors chasing trends. The bullish environment seems to have slowed new bets, with only 36 activist short campaigns announced in the fourth quarter of 2020, the lowest of that period since records began in 2013, according to Activist Insight Shorts data. Short sellers are wary of bets that will take time to play out, and are waiting for market conditions to change before ramping up their activity.

Supply and demand

Before the bubble bursts, however, short sellers are having to watch their steps more carefully than ever before. “If I see things go wrong, I’m out,” Citron Research founder Andrew Left told Activist Insight Shorts. The short seller wakes up and views every day with fresh eyes. “Reassess and respect the environment around you,” he added.

One sting that may have led to that conviction was Citron’s position in GSX Techedu. Grizzly Research initially accused the company of doctoring its books in a February report and a few months later Citron joined the fray. But with such a volatile market, a company doesn’t have to do much to send its stock soaring.

Citron published a report against GSX in April, claiming that the Beijing-based online education company was overstating revenue by up to 70% and should halt trading to launch an internal investigation. Refuting the short reports and publishing extremely positive results, GSX saw its stock rise 313% from the publication of Citron’s report.

“GSX was a total fraud,” Left maintained when talking to Activist Insight Shorts. “But they were the biggest losers last year for everyone. The company was able to play the supply and demand game.”

Explosive events

A way to counter the market frenzy could be to wait for an explosive event within a company before releasing a short report. “In this market, you can’t short and hold on,” White Diamond Chief Financial Officer Adam Gefvert told Activist Insight Shorts. “You have to get in and out.”

The short seller drove this point home with an October short report against technology company CleanSpark, claiming the company’s failed business model is about to be impacted further by a court battle involving its largest shareholder. The stock fell 29% to lows of $7.21 within a month but has since recovered more than 287%.

Quintessential Capital Management struck at Penumbra at the right time, alleging in November that the company’s flagship catheter device has a “structural design flaw that makes it prone to critical malfunctioning” and could soon lead to its recall. Just over a month later and the catheter was withdrawn with the company citing risk of unexpected death or serious injury. During that first month, Penumbra’s stock plummeted 33% to $174.98 but has since recovered to close at $233.04 Thursday.

Gefvert is optimistic about the future, though, and is looking forward to a bearish market returning once more.

Muddy Waters founder Carson Block told Activist Insight Shorts that he thinks the supply of new stock issuances and SPACs will surpass demand. This, coupled with a calmer political news environment giving more space for market-focused stories, could mean the end is near. “Job losses among knowledge workers would slow 401K contributions, and thereby make the overall market less buoyant,” he told Activist Insight Shorts.