Fast-money bears are feasting in the new-year equity selloff as traders recalibrate bets on the path of Federal Reserve policy.
A basket of the most-shorted stocks dropped 1.3% Wednesday, its sixth straight session of declines, after better-than-forecast data on retail sales and housing sapped faith that interest-rate cuts are imminent. Down in all but two days in 2024, the group of disliked companies has fallen 11% over the stretch, marking its second-worst start of a year since the global financial crisis.
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For now, the slump is a boon to bears who are bold enough to venture new bets after being burned last year. Hedge funds have been reloading on shorts, with positions rising on nine of the past 10 sessions through Friday, according to JPMorgan Chase & Co.’s prime brokerage unit. Goldman Sachs Group Inc.’s trading desk also observed a “noticeable” increase in shorting activity.
Hedge funds are “starting to re-gross and grow single stock shorts” after November and December’s surprisingly strong markets, Bobby Molavi, a managing director at Goldman, wrote in a note earlier this week. “Early action does point to a richer stock picking environment.”
Of course, hedge funds aren’t the only ones benefiting from shorting. Broadly, short sellers are up 2.8% this year, data compiled by S3 Partners show, with bets against names like health-care platform Agilon Health Inc. and real estate investment trust Medical Properties Trust Inc. yielding the highest profits.
Rising anxiety about everything from a conflict in the Middle East to rising 10-year Treasury yields to a mixed start to earnings season pushed investors away from stocks with shaky fundamentals and into companies with bullet-proof finances. A quartile of Russell 1000 stocks with the highest debt relative to total assets — which include stocks like Hertz Global Holdings Inc. and Avis Budget Group Inc. — is on pace for the worst month since August relative to a similar quartile with the lowest burden, data compiled by Bloomberg show.
“A recent rally had investors add longs to their books and cover short positions that weren’t working, but the moods have changed since then,” Joseph Saluzzi, co-head of equity trading at Themis Trading LLC, said by phone. “The market looks like it’s setting up for some sort of downdraft, and when things head south, the weakest companies tend to fare the worst. After such a big rally in 2023, you don’t have any easy passes.”
Article by Lu Wang, Elena Popina of Bloomberg News, Advisor Perspectives
