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Saturday, April 1, 2023


After Brutal Squeeze, Shorts Return With A Vengeance

By now everyone, of course, knows that the Fed has broken what was once called “the market” beyond repair. Add to that zero liquidity, a still healthy army of HFT bots and the explosion in 0DTE option trading…

… and what you have is a market that looks like this on a daily basis.

Nowhere is this brutal swing more visible than in the furious ebb and flow of shorting and squeezing activity. 

After the massive pile up of shorts in late December, when tax loss selling was accompanied by rapid and aggressive degrossing and shorting by hedge funds, it didn’t take long for the squeeze to steamroll the fast money just as fast.

As a reminder, last Monday, we showed the latest JPM prime brokerage data which revealed that “high SI stocks in the US have seen a ~6 week period of persistent short additions. The magnitude and duration of these short additions is on par with the largest we’ve seen in past years and the cumulative additions put shorts in these types of stocks back at multi-year highs.”

This striking observation of near-record shorting by hedge funds, prompted JPM to muse that “given the consensus bearish view of Equity markets, driven by expectations for the Fed to hike us into a recession, a sharp squeeze would catch a number of investors offsides” and conclude that we are setting up for a tech-led squeeze higher as shorting gets extreme.”

Indeed, that’s precisely what happened next and as shown in the chart below, the Goldman most shorted basket erupted almost 20% higher in just the past week.

Of course, the squeeze didn’t last long – it rarely does unless the Fed is also lifting offers – and as we reported yesterday citing Goldman’s Prime Brokerage, “while US Single Stock shorts have been net covered for 6 straight sessions on the Prime book, Macro Products (Index and ETF combined) saw renewed shorting activity on Friday and Tuesday.”

Additionally Goldman estimates “suggest the performance of Systematic L/S and Multi-Manager Platforms, both of which were more challenged in the past two weeks and likely contributed to the recent risk unwinds, have stabilized in the past few sessions.”

Underscoring this dynamic, Goldman trader Michael Nocerino declared that the “short cover bid is now gone… Yesterday the cover bid that was present for the first 2+ weeks of 2023 got pulled out from underneath us. Our Most Short Basket {GSCBMSAL Index} traded 3% lower but is still up 12% on the year…watch for this basket (and the rest of lower quality) to move lower today w/ some negative developments post yesterday’s close.

So if you are not getting squeezed, what do you do? Why you re-short of course until the next positive catalyst jerks the market higher and the next squeeze begins again. Sure enough, this is what happened: as Goldman’s John Flood describes yesterday’s action, there was “somber tone all session with negative CTA momentum, broken technical, hawkish ECB and dicey earnings (PG and AA focal points here). We saw L/O supply in consumer staples on heels of PG miss. HF cover bid vanished today and lowest quality pockets of the markets trended sharply lower.”

Translation: after a squeeze sent the most shorted names up the most in years, they are being reshorted again and are tumbling, to wit: 

Renewables (GSXURNEW) -389bps, Non Profitable Tech (GSXUNPTC) -362bps, Most Short (GSCBMSAL) -274bps and High Retail Sentiment (GSCBHRSB) -265bps.

And the punchline: “Overall executed flow across GS equities franchise had -847bp sell skew vs 30d avg of -175bps (79th percentile on 1 yr look back). Info Tech -24% sell skew fell in 92nd percentile on 1 yr look back. L/Os ended with a 9% sell skew vs 30d avg of a -2% sell skew.” And yes, even ‘comeback kid’ Netflix was aggressively sold “we saw HF long selling in NFLX post close (9 out of 10 in terms of crowded long here).

What happens next? Depends on whether the pile up in shorts can accelerate momentum to the downside. They won’t get much help from CTAs which remain largely bearishly positioned, and only a sharp puke from here can get them to pile in. On the other hand, should the S&P rebound back over 3965, or the MT CTA trigger, trend-followers will resume buying at which point the shorts will once again scatter.

One can also argue that spoos don’t even have to rise that high: if they can defend the 50DMA at 3923, the downside momentum will be broken, and the next squeeze will start and slowdown as it hits the now infamous descending channel resistance which will be just below 4,000 on the next cycle. At that point it will be up to the bulls: will they fail to “rise above” for the 7th consecutive time…

… or will they finally breach resistance opening up the path to 4,200, if purely based on technicals.

This post was originally published on this site

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