S&P 500 Short Bets Are Worryingly Scarce, Wells Fargo Says

(Bloomberg) -- Bets against the stock market are hard to come by these days, but that’s not necessarily good news to Wells Fargo. 

Short interest in the S&P 500 has remained near historic lows for a large portion of 2021 as the U.S. equity benchmark has climbed to new heights. That’s concerning in the longer term, as higher short interest levels tend to help minimize price gapping when the market is faced with unexpected risks or shocks, said a team of strategists including Christopher Harvey in a Thursday note to clients.

“Current levels of SI indicate significant scope for shorting, which we view as a risk,” the strategists said.  

On the other hand, the continued trend of low short interest suggests that investors who brushed off fears of shrinking large cap margins prior to the third quarter earnings season have largely been correct. So far, 200 companies in the S&P 500 have beat earnings per share estimates, outpacing the 33 companies that have missed, according to data compiled by Bloomberg.

While the current low levels remain a risk, the strategists also said short interest may pick back up after the earnings season ends and investors begin to focus on the macroeconomic calendar. 

“To me it feels more like complacency than euphoria -- just the idea that equities are the default asset class of choice. Cash and bonds are so unattractive. That, over time, can lead to a degree of complacency or perhaps inattention to risk factors,” David Donabedian, chief investment officer of CIBC Private Wealth Management, said by phone.

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