(Bloomberg) — Who knows why stocks picked Tuesday to surge. But one fact to consider is the immense bout of short selling that went on last week.

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Hedge funds tracked by Goldman Sachs Group Inc. doubled down on bearish wagers, with the dollar amount of short sales hitting the highest level since the 2008 financial crisis. Similar trends were on display at prime broker units of Morgan Stanley and JPMorgan Chase & Co., where bearish positions increased among clients.

There are signs that short covering may be at work during Tuesday’s market bounce. As the S&P 500 climbed more than 2% as of 12 p.m. in New York, a Goldman basket of the most-shorted stocks surged by almost twice that.

Bearish positioning has helped money managers fare better during the 2022 equity beatdown that dropped the S&P 500 more than 20% from its record, though at times such bets serve as fuel for rallies when bears are forced to cover.

“It raises the question of what might happen if we were to get a more meaningful rebound and breakout from the market downtrend,” JPMorgan analysts including John Schlege wrote in a note Friday. “We could be closer to the lows than we were a few days ago.”

Bearishness has grown amid relentless selling that sent stocks down in 10 of the last 11 weeks, including back-to-back routs of at least 5%. In the week through Thursday, short sales spiked across single stocks and macro products such as exchange-traded funds, Goldman data show. At JPMorgan, the amount of added shorts was more than three standard deviations above the historic average.

“Managers increased micro and macro hedges amid the sharp market drawdown,” Goldman analysts including Vincent Lin wrote in a note. “With the sole exception of staples, all sectors saw increased shorting.”

Story continues

It’s not unusual to see skeptics adding to bearish positions during market crashes. According to Goldman, nine of the 10 largest shorting weeks occurred around bear markets. Returns on the following day were mixed, with the S&P 500 delivering a wide range of outcomes, from up 7% to down 12%, data compiled by Bloomberg show.

Bears are reloading after having been almost driven into extinction during the past decade, when the Federal Reserve’s tendency to come to the market’s rescue crushed every attempt to bet against stocks.

Now, with the Fed embarking on the most aggressive tightening in monetary policy in decades, as much as $15 trillion has been erased from equity values so far in a boon for short sellers.

The increase in bets for further declines, along with an unwinding in long 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, slipped last week to the lowest since April 2009, data compiled by Morgan Stanley show.

Positioning data like this is widely watched to gauge whether equities are approaching a bottom. To David Rosenberg, chief economist and strategist at Rosenberg Research & Associates Inc., it’s too early to call all clear.

“Short covering gives equities a big boost,” said Rosenberg. “This move should be viewed in the context of an overall downtrend — meaning rallies can be rented but not owned.”

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