Banks and blue chip energy-related counters are among the most shorted stocks on the Straits Times Index (STI) as investors react to plunging oil prices and worries over global growth.
The increase in short-selling has been so marked that traders partly blame the practice for driving the STI's 12 per cent fall so far this year.
Selling by fund managers on the orders of nervous clients has also swelled the red ink on the local bourse, they added.
Sembcorp Industries has been the most actively shorted stock this week, followed by Keppel Corp, according to Markit data.
Short interest as a percentage of Sembcorp's outstanding shares jumped to 4.23 per cent. About $21 million worth of its stock was short-sold on Wednesday, according to Singapore Exchange data.
Short interest as a percentage of Keppel's outstanding shares rose 19 per cent to 4.05 per cent. Around $31.3 million worth of its shares were shorted on Wednesday.
"There's huge shorting interest by speculators on STI constituents. Short-sellers make money when the market is crashing. They are making use of the excuse of low oil prices and weak global growth to short the market," a remisier said.
Short interest as a percentage of the three banks' outstanding shares has jumped this week, ranging from a 15 per cent increase for OCBC to 27 per cent at DBS.
Around 820,000 to three million of the banks' shares were short sold on Wednesday.
Mr John Cappetta, head of managed solutions advisory Singapore at Bank Julius Baer, said: "Banks tend to be more defensive plays in a market sell-off. But we are not seeing that this time because of what is happening in China.
"One concern is when the market sell-off in China will come to an end. Another is the exposure of Singapore banks' balance sheets to China... In addition, with Asian economies slowing down, there are concerns that rising interest rates will make the cost of restructuring non-performing loans more expensive and deter lending activity."
Pressure on the STI is also coming from fund managers, who are getting hit with redemption orders from jittery retail and institutional investors who want to reduce their asset allocation in Asia and move to the United States and Europe, Mr Cappetta said.
"Most fund managers have about 5 per cent to 10 per cent cash in their portfolio. Depending on the volume of redemption orders, if they don't have enough cash, the fund managers will have to redeem the underlying equities of the equity funds to raise cash to meet the redemptions," he added.
Fears of a China-led global economic downturn and perceived policy missteps by Beijing have sapped investor confidence, Mr Cappetta noted. The big question is how much more will China's growth continue to slow.
"While the redemptions are driven more by sentiment than fundamentals, policy missteps aren't going to inspire big institutional investors to allocate assets in China," he said.
With growth concerns mounting, investors raised their cash holdings to 5.4 per cent - the third-highest reading since 2009, from 5.2 per cent last month, according to Bank of America Merrill Lynch.
