FAST FIVE: One Giant Short Squeeze: S&P500 Short Interest Tumbles To 12 Year Low
One of the recurring market themes we have observed in recent weeks is that just because hedge funds have been painfully – if only from a P&L perspective – underexposed to the recent rally in the stock market, the “pain trade” is higher and that the higher the market rises, the more investors will be forced to buy.
And at least superficially, this take is accurate because as the following chart from Goldman Sachs Prime Services as of Feb 15 2019 shows, both gross and net hedge fund exposure is near the lowest level of the past 2 years.
But while it remains a mystery why professional investors continue to boycott the market even as the S&P is rapidly approaching both 2,800 and its Sept 2018 all time highs, we now have a good idea of what has caused the relentless lifting in the market, even without the aggressive participation of retail and institutional investors (who, in fact, have continued to sell risk assets).
The answer, which we doubt will come as a surprise to many, is that in addition to buybacks which as noted earlier today are tracking some +91% higher compared to the same period in 2018 according to BofA client data suggesting another record year for stock repurchases, is stock buybacks.
And whether the short squeeze has been forced or due to funds covering bearish exposure, this dramatic reduction in short activity has resulted in stocks with the highest ratio of short interest to float cap to significantly outperform in most sectors during the recent market rebound, as shown in the next chart. Two final observations: as shown in the next chart, the 50 stocks with market caps larger than $1 billion with the highest short interest outstanding relative to cap have posted a median YTD return of 24%.