Market Experts Warn of Looming Financial Crisis

Short sellers recently amassed significant profits within a highly volatile banking sector. In just three days, these short sellers generated over $2 billion in paper profits as the collapse of Silicon Valley Bank triggered a cascade of selling across the stocks of regional lenders. According to data provided by S3 Partners, mark-to-market gains reached $2.29 billion during this tumultuous stretch.

The ETF's three-day selloff reached 23% after the Federal Deposit Insurance Corp. seized both Silicon Valley Bank and Signature Bank. The SPDR S&P Regional Banking ETF (KRE), which includes SVB Financial Group, experienced its steepest plunge since 2020. However, the ETF managed to recover some ground, along with the broader stock market, as traders speculated that the worst of the turbulence had passed.

During this period, short sellers reaped substantial profits, with nearly 98% of each dollar short in the sector yielding gains. For those who bet against SVB or Signature, paper gains amounted to almost 40% of the total over the three-day period. Unfortunately for short-sellers, the shares were halted, leaving them unable to realize their sizable profits at the moment.

The ongoing turmoil in the banking sector has prompted caution among market experts, as the total mark-to-market profits across regional bank short positions for March amounted to roughly $3.5 billion. Some of these gains were likely wiped out by the subsequent bounce back in the hard-hit sector. According to S3 analysts, the day's move could trigger a wave of short covering in some regional banking stocks. However, they also anticipate that once stock prices stabilize, some shorts who trimmed or exited their positions may re-enter their fundamental-based shorts.