Bears are going extinct in US stock market
Skeptics are a dying breed in American equities. It's another illustration of how risky it has become to doubt the resilience of the market's $13 trillion surge since late March.
Going by the short positions of hedge funds, resistance to rising prices is the lowest in 16 years. Bears pulled out as buying surged among professional investors who were forced back into stocks despite a recession, stagnating profits and the prospect of a messy presidential election.
While perhaps logical given open-ended Federal Reserve support, rampant covering depletes at least one source of support for shares -- buying by speculators who sold them short. Virtually every constituency in the market has gotten more bullish as the S&P 500 surged 52 per cent in five months. In the past 21 sessions, there hasn't been a drop of 1 per cent, the longest stretch since January.
"The repurchase of those short shares has been a factor which has contributed to the rally that we've enjoyed," said Lawrence Creatura, a portfolio manager at PRSPCTV Capital. "It will certainly be a weaker force going forward, because mathematically it's just simply a smaller quantity of outstanding shares that are still short."
The S&P 500 added 0.7 per cent over five days last week, notching its fourth straight weekly gain. It exceeded the Feb. 19 record high on Tuesday to cap the fastest bearmarket recovery in history. The Russell 2000 Index of smaller companies fell 1.6 per cent while the Dow Jones Industrial Average was virtually flat. The Nasdaq 100 performed better, climbing 3.5 per cent.
Steamrolled by a rally whose velocity is the strongest in decades, bears are giving up. At the start of August, the median S&P 500 stock had outstanding short interest equating to just 1.8 per cent of market capitalisation, the lowest level since at least 2004, data compiled by Goldman Sachs Group Inc show. All major sectors except energy saw bearish bets sitting in the bottom decile over the last 15 years.
"It looks like all those fund managers over the past quarter went from being bearish and expecting a stock market crash to now bullish," Shawn Cruz, senior market strategist at TD Ameritrade, said in an interview. "Sentiment's turned positive about equities in general but also sentiment is turning positive for a return to growth."
The tide is getting harder to fight with retail investors flocking to unprofitable companies. More money manages are forced to embrace the rally, ignoring this year's profit contraction and banking on fiscal and monetary stimulus. At 26 times forecast earnings, the S&P 500 was trading at the highest multiple since the dot-com era.
Obviously, rallying stocks are bad for bears -and that frequently pushes them out of the market at times that might be ripe for skepticism. Consider the internet frenzy 20 years ago. Back then, large speculators, mostly hedge funds, were net short on S&P 500 futures in all but five weeks in 1998 and 1999. Those mostly losing bets were completely squeezed out in 2000. That's when the crash came.
— Bloomberg