One significant element that has been driving the two-month equity surge, the short squeeze, is beginning to show signs of slowing.
The actions of short sellers, whose frenzied attempts to reverse bearish bets created buying that contributed to the $7 trillion share rise. Now that the process is waning, evidence is starting to emerge.
According to statistics from JPMorgan Chase & Co.’s (NYSE:JPM) prime broker division, hedge funds that make both bullish and bearish equity wagers essentially ceased buying shares to return to lenders last week after doing so at the quickest pace in more than two years.
Goldman Sachs Clients Increase Short Holdings
In the meantime, hedge fund clients of Goldman Sachs Group Inc.(NYSE:GS) increased their short holdings on Wednesday, with bets on exchange-traded funds increasing to their highest level in more than two months.
From a few technical vantage points, the change makes logical. This week, the S&P 500 was unable to surpass its 200-day average, a significant long-term trendline. Events that could be bearish include the annual meeting of central bankers in Jackson Hole, Wyoming, as well as the release of statistics on consumer prices and employment. Markets are a little sluggish tactically at present as investors price in positive inflation and Fed news.
As many went short during the first-half rout and were caught off guard by the following comeback, computer-driven traders, such as trend followers, who are most active in the futures market, have snatched up almost $100 billion of stocks since the market’s bottom in June.
Data from Morgan Stanley (NYSE:MS) revealed that there are still a significant number of open bearish positions. While $50 billion in cash market short positions have been filled since June, this year’s net addition of short positions is still substantial at $165 billion. The 84th percentile of a one-year range for short interest in single stocks is currently being reached.
However, the short basis in US equities has not yet been cleaned up, according to a note from Morgan Stanley. “There is a greater possibility for hedge fund short covering because short leverage is still strong.”
Hedge funds, meanwhile, are currently taking a break. The hedge-fund customers of JPMorgan ceased covering last week after spending the previous month unwinding negative wagers at a rate last seen at the beginning of the current bull market.
The greatest rise in gross trading activity since the market’s low in mid-June occurred on Wednesday at Goldman because hedge funds expanded short sells while adding long positions. Though with shorts sales overtaking long buys at 3-to-1, net selling has hit a three-week high.
Short Squeeze Boosts Market During Mid-Summer Lull
According to Benjamin Dunn, CEO of Alpha Theory Advisors, the unwinding of short positions boosted market gains during the summer slowdown but all the prudence signals that the downside risk is probably limited, setting the foundation for potential future gains should conditions start to improve.
Nobody believes the rally, according to Dunn. Although many people who wanted to sell already sold, he continued, “We could be in for a time of weakness.” “In this market, that has been the issue for the past few months. There is almost nothing essential about it; all it is is location.
Featured Image: iStock ©Darren415
Author Jowi Kwasu 
