(Bloomberg) – Order has been restored to the world for bearish traders, with their favorite targets once again under pressure after surging in the recent rally in stocks.
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Stocks with the biggest short yields fell 3.5% on Tuesday, more than double the losses of the S&P 500, in thematic baskets compiled by Goldman Sachs Group Inc. In what could be a sign that the bears are recharging, Russell 3000 stocks with the highest quintile of short selling trailed those with the lowest by more than 2 percentage points, according to data compiled by Bloomberg.
The pullback came as a four-day slump took the S&P 500 back below its 200-day moving average on fears that stronger-than-expected reports in the U.S. labor market and services industry could force the Federal Reserve to stick to its aggressive rate of tightening to rein in runaway inflation.
The renewed selling is vindication for hedge funds, which Wall Street’s top brokers said added to bearish bets last week on market gains. While earlier episodes of deepening declines like this have given way to short cuts this year, this episode reflects growing anxiety ahead of next week’s inflation reading and the Fed’s final policy decision of 2022. .
“Few HF see much upside at current market levels and may be looking to trade the range,” the JPMorgan Chase & Co. team, including John Schlegel, wrote in a note to clients on Friday. “Positioning levels still look pretty low longer term (which could support a rally), but they’re not as low as they were at the end of September to argue that the market will continue to ignore bad data points. .”
With the S&P 500 on course for its second double-digit loss in 20 years, it’s been a rewarding time for bears. Down more than 40%, Goldman’s basket of best-selling stocks is poised for its worst annual performance since data began in 2008, a loss that essentially equates to profits for those betting against those stocks.
But reaping those gains would have required a strong stomach. Bear market rallies have happened time and time again, including a 14% jump in the S&P 500 in the seven weeks to the end of November. Short sellers were forced to unwind a total of $53 billion of their positions in individual stocks last month alone, according to IHS Markit data compiled by Morgan Stanley’s sales and trading team. It’s the fastest short cover since at least 2018.
Yet the bears remain intimidated. On Wednesday, when the S&P 500 jumped 3% on comments from Fed Chairman Jerome Powell about a possible drop in the pace of tightening, hedge funds tracked by JPMorgan stepped up their bets against individual stocks.
A similar pattern played out at Goldman, where hedge fund clients last week shorted at a rate that outpaced their long buys by a 1.5-to-1 ratio. fund clients increased short selling, with the bulk of the additions concentrated at the index level through exchange-traded funds and in the technology and financials sectors.
Audacity pays off, at least for now. Goldman’s basket of top-selling stocks has fallen more than 3% for two straight days.
From Morgan Stanley to JPMorgan, many Wall Street firms have seen their strategists call for the S&P 500 to test its 2022 lows next year, citing everything from an impending earnings contraction to persistent Fed tightening.
The gloomy sentiment received further impetus from Goldman’s financial services conference on Tuesday, where some Wall Street chiefs sounded the alarm about consumer weakness.
It’s “a bit of a perfect short-term storm,” said Dennis DeBusschere, founder of 22V Research. “Fed reviewing lagged data pushes terminal rate up at same time companies sound worse and worse on growth outlook.”
–With assistance from Melissa Karsh.
(An earlier version of this story has been edited to correct spelling of Morgan Stanley in the fourth paragraph below the table.)
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