The Stock Rally follows the largest Binge Shorting Hedge-Fund since 2008

The Stock Rally follows the largest Binge Shorting Hedge-Fund since 2008

(Bloomberg) – Who knows why stocks chose Tuesday to rise. But one thing to keep in mind is the huge open sales period that occurred last week.

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The hedge funds monitored by Goldman Sachs Group Inc. doubled on falling bets, with short-term dollar sales reaching their highest level since the 2008 financial crisis. customers.

There are indications that short coverage may work during Tuesday’s market recovery. As the S&P 500 climbed more than 2% at 12 p.m. In New York, Goldman’s basket of stocks with the most shorts almost doubled.

The downturn helped money managers do better during the 2022 stock crash that knocked the S&P 500 more than 20% from its record high, although sometimes such bets serve as fuel for a rally when bears are forced to cover.

“It raises the question of what could have happened if we had had a more substantial recovery and outburst from the downturn in the market,” JPMorgan analysts including John Schlege wrote in a note Friday. “We could be closer to the lows than we were a few days ago.”

The downtrend has risen amid uninterrupted sales that have pushed shares down 10 of the past 11 weeks, including continuous trades of at least 5%. In the week to Thursday, open sales rose on individual stocks and macroeconomic products, such as stock exchanges, according to Goldman. At JPMorgan, the number of extra shorts was more than three standard deviations above the historical average.

“Managers have increased microeconomic and macroeconomic hedging in the midst of a severe market downturn,” Goldman analysts, including Vincent Lynn, wrote in a note. “With the exception of basic products, all sectors showed increased short-circuiting.”

It is not uncommon to see skeptics add declining positions during a market crash. According to Goldman, nine of the 10 longest weeks of short circuiting occurred around bear markets. Yields the next day were mixed, with the S&P 500 offering a wide range of results, from 7% to 12%, according to data compiled by Bloomberg.

The bears are reloading after they had almost disappeared in the last decade, when the Federal Reserve’s tendency to bail out the market thwarted any attempt to bet on stocks.

Now, with the Fed launching the most aggressive monetary tightening in decades, up to $ 15 trillion has been written off from stock values ​​so far as a benefit to short sellers.

The increase in bets on further reductions, along with the easing of long-term holdings, has led to a broad reduction in equity exposure among professional speculators. Net leverage for long / short hedge funds, a measure of their risk appetite, fell last week to its lowest level since April 2009, according to data compiled by Morgan Stanley.

Placement data like this is widely monitored to measure if stocks are approaching the bottom. For David Rosenberg, chief economist and strategic analyst at Rosenberg Research & Associates Inc., it is too early to say.

“Short coverage gives stocks a big boost,” Rosenberg said. “This move should be seen in the context of an overall downward trend – which means that rally cars can be rented but not owned.”

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