(Bloomberg) -- After raising bearish wagers in one of the longest stretches in years, short sellers are being forced to fold during the best two-day equity rally since April 2020.
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Stock Shorts Fold in Best Two-Day Rally Since 2020: Markets Wrap
The S&P 500 has climbed more than 2.5% for a second straight session as speculation builds that global central banks could soften their aggressive policies to avoid a serious financial fallout. At the center of the rally are most-shorted stocks, as tracked by Goldman Sachs Group Inc., which jumped almost 6% as a group on Tuesday, handing losses for those who had placed bet against them.
The surge is dealing acute pain for professional speculators, who raised shorts last month as the S&P 500 plunged to fresh bear-market lows. For 11 straight sessions through Thursday, hedge funds tracked by Morgan Stanley boosted short positions against exchange-traded funds, sending their overall equity exposure to a 13-year low.
The comeback in stocks, after the S&P 500 suffered its worst September in two decades, is also a headache for rules-based funds that had boosted bearish equity bets as volatility spiked and the market lost momentum. Trend followers like commodity trading advisors, for instance, last week saw their equity positioning approaching the trough observed at the height of the 2008-2009 global financial crisis, JPMorgan Chase & Co.’s data show.
“Shorts remain extreme from the CTAs to the hedge funds,” said Andrew Brenner, the head of international fixed-income at NatAlliance Securities. “This could change to a reversal Tuesday, but for now risk-on, given the large short base, is winning.”
While short sales have helped skeptics such as hedge funds fare better during 2022’s bear market, they at times became a source of stress when a sudden share rally forced a squeeze. Predicting when an unwind would happen is all but impossible as policy developments in countries such as the UK or Australia have become one of the catalysts stoking market moves.
For now, hedge funds and CTAs seem to have got the market timing wrong. But they’re not the only ones. The equity bounce is also penalizing retail investors, who, based on JPMorgan estimates, last month dumped the most in single stocks in data going back to 2015.
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