Every stock index and sector has participated to one degree or another: small caps, large caps, growth, value, you name it. It has been a complete melt-up for stocks with the Dow Jones Industrials gaining 2,593 points — a vertical ascent of 16.7% — in just the last 10 weeks.
And what do we have to thank for this miraculous reversal of fortune?
Better economic data? Well, it has improved somewhat, but GDP growth estimates are still dismal at just 0.3% this quarter.
No, we have skeptical bears to thank for the magnitude of this rally according to Bloomberg; particularly the short-sellers!
Bearish bets on stocks recently reached the highest level since the 2008 financial crisis, with short interest rising virtually in lock-step with the S&P 500 Index as you can see in the graph below.
|High bearish bets on stocks|
The Very Big Short
Even as U.S. stocks rebounded by some $2 trillion in value over the past six months, skeptical bears were apparently just as busy amassing a $1 trillion short position.
And the skepticism has been widespread, among retail and professional investors alike.
According to data from the Commodity Futures Trading Commission (CFTC), bearish bets on S&P 500 futures reached a four-year high in mid-March, and have only declined slightly since then.
What’s more, mutual fund managers are more skeptical of this rally now than at any time since 2010. Investment managers are holding above average cash reserves equal to 9.3 percent of assets according to Citigroup research. That compares to a cash stash of just 7.2% of assets one year ago.
This means the investment pros have been feeling the pain of their wrong-way bets on a market decline, and are feeling performance pressure for being on the sidelines as stocks soared.
Now they’re likely helping fuel the stock market rally as they throw in the towel, cover their shorts and go long.
And there’s plenty of room for stocks to run thanks to the big short that’s now unwinding.
|“There’s plenty of room for stocks to run thanks to the big short that’s now unwinding.”|
Long futures contracts on the S&P 500 have gained about 10.6% since September, but overall positioning is still 23% below the five-year average, according to CFTC data, meaning a lot more buying is likely.
Plus, short interest on the New York Stock Exchange remains at unusually high levels. In order to fall back to the average of the last six years, short interest needs to decline by another 15%!
That also means plenty of additional buying pressure that could send stocks even higher.
Or, perhaps the skeptics will be proven right after all if a sizable market decline happens soon and their big-short pays off. Stay tuned.
What’s your take? Have stocks come too far too fast and is the market vulnerable to a sharp correction?
Or will share prices keep soaring as short sellers run for cover? Let me know what you think by joining the discussion below.
The Swedish Riksbank joined the latest parade of central banks trying to flood the market with cash to weaken their currencies. It boosted its QE program by 45 billion kronor, or around $5.6 billion, adding to an effort already pegged at 200 billion kronor through June. But it didn’t cut interest rates deeper into negative territory from the current negative-0.5%. And like with other recent central bank actions, the news actually caused the opposite reaction in the country’s currency. It rose sharply. As for the European Central Bank, it did nothing with rates or its QE program. That was as expected considering all the policy measures announced just over a month ago.
It was a mixed bag on the economic front today. Initial jobless claims fell to 247,000 in the most recent week, contrary to market expectations for a slight rise. That puts claims at the lowest level since the early 1970s. On the other hand, the Philadelphia Fed manufacturing index tanked to minus-1.6 in April from 12.4 in March. That was far worse than the 9.9 reading expected by economists.
Rent a car or take an Uber? Business travelers are increasingly choosing the latter option, and it’s hurting the U.S. rental car industry, according to Bloomberg. A new study by travel and business expense software company Certify finds that 43% of ground trips expensed through its system were Uber rides, compared with only 40% for car rentals. Rental car transactions overall have dropped 15 percentage points over the past two years, one reason stocks like Hertz Global Holdings (HTZ) and Avis Budget Group (CAR) have performed so poorly in the past several quarters.
The $20 bill will get a new face starting in 2020. Abolitionist Harriet Tubman will replace former President Andrew Jackson on the currency, making her the first African American on the front of a U.S. bill. She will also be the first woman since Martha Washington temporarily had her face on a $1 silver-backed paper bill in the late 1800s.
The Money and Markets team
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