Short sellers are betting consumer discretionary stocks will go down, particularly home furnishing retailers.
Consumer discretionary was the top shorted sector in April, followed by Healthcare and Energy stocks, according to S&P Global Market Intelligence data.
Short interest in the Consumer Discretionary sector rose 73 basis points between January and mid-April to 5.28%. The percentage of outstanding shares held by short sellers within the category highlights their belief that demand for everything from home furnishings to electronics will shrink.
The most shorted stocks within the consumer discretionary sector were home furnishing retailers- which include names like Kirkland's (KIRK), Bed Bath and Beyond (BBBY), Sleep Number (SNBR) and Williams Sonoma (WSM).
Computer and electronics retailers were the second most shorted stocks within the category, followed by department stores, speciality stores and automotive retail.
Consumer discretionary stocks have seen a sharp decline this year amid high inflation and energy prices. Households are getting squeezed by elevated gasoline and housing costs. The monthly number of home sale transactions have also been trending lower, which also takes a toll on consumer discretionary items for the home.
Additionally, spending is shifting away from physical goods to experiences like travel and leisure as the pandemic wanes.
"I actually think consumer discretionary is going to continue to go down, not so much because of rising prices that people can't afford it but demand was pulled forward during covid," Josh Wolfe, co-founder of Lux Capital told Yahoo Finance Live.
"People don't need their extra Peloton (PTON), they don't need more clothes, they don't need another computer. They basically pulled forward years of demand."
The S&P 500 Consumer Discretionary sector XLY (XLY) is one of the biggest decliners year-to-date, down almost 20%.
Ines is a markets reporter covering equities. Follow her on Twitter at @ines_ferre