It usually doesn’t work this way: stocks vaulting to records, and bearish traders getting more aggressive. Lately, it has.
The S&P 500 Index has climbed 7.9 percent since January, including its biggest gain since April in the just-completed week. At the same time, short interest as a proportion of total shares outstanding has also expanded, rising by 0.3 percentage point to 3.9 percent.
(Some definitions: A short seller borrows stock and immediately sells it, betting that the price will fall by the time the short seller has to buy it back and return it to the lender — and making money on the price difference. Short interest is the quantity of stock that investors have sold short but haven’t yet bought back. )
Never before has an equity advance as big as this year’s occurred simultaneously with more short sales, according to exchange data compiled by Bloomberg that goes back to 2008.
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It’s not hard to see why bears are standing firm, when any economic or political mishap could wreak havoc in a market where valuations sit at levels not seen since the dot-com era. Just one week ago, stocks suffered their worst rout in eight months as concerns over Donald Trump’s presidency surfaced. Yet the loss was quickly erased and the S&P 500 rose seven straight days to reach record highs.
The S&P 500 rose 1.4 percent to 2,415.82 over last the five days, finishing the week with the best gain in a month. The Dow Jones industrial average added 275.44 points, or 1.3 percent, to 21,080.28. Technology shares continued to outperform as the Nasdaq 100 Index jumped 2.4 percent.
The challenge for short sellers is how long they can stay solvent before being forced to buy back the shares that they have borrowed and sold. And the pressure to cover is building. A Goldman Sachs Group basket of most-shorted stocks has jumped 6 percent this quarter, almost triple the return in the S&P 500.
“This continues to be a bull market that every one loves to hate,” said Jeff Korzenik, the Chicago-based chief investment strategist at Fifth Third Bancorp, which oversees $33 billion. “It’s one reason why we’re bullish. There is none of these euphoria that’s associated with market tops.”
The steady drumbeat of gains has made life difficult for bears. Hedge funds that aim to profit from short bets have lost money almost every year since 2009, a stretch where share prices more than tripled, according to Hedge Fund Research.
Bears have generally been willing to back off during equity rallies. But this time, that willingness to surrender is nowhere to be found. Even as hedge funds with a bearish bias are down 5 percent this year, they’re gearing up for lower share prices.
The resistance among short sellers seems to be consistent with the defensive stance prevailing in the market.
Investors are pulling money out of stocks after the initial rush to buy faded along with the optimism over Trump’s pro-growth policy. They have withdrawn $20 billion from exchange-traded funds and mutual funds this quarter, reversing about one third of the inflows seen between November and March, according to data compiled by Bloomberg and Investment Company Institute.