The Usual Suspect Short-Covering Is Innocent in This Stock Rally
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The Usual Suspect Short-Covering Is Innocent in This Stock Rally

It’s a common refrain among skeptics on days like this when the stock market rallies at such a breakneck pace despite lingering uncertainty: It’s all just short-covering.

While there may be some of that at work, positioning data for major equity index futures and exchange-traded funds -- while imperfect -- do not suggest bearish bets were so crowded heading into the election that this surge higher is all simply a short squeeze. The S&P 500 climbed 2.2% Wednesday, the most since June, and the Nasdaq-100 Index jumped 4.4% for its biggest gain since April.

When it comes to e-mini futures on the S&P 500, speculators were actually net long some 115,439 contracts -- the most bullish since January 2019 -- as of a week ago, according to positioning data from the Commodity Futures Trading Commission. Short interest on the biggest ETF tracking the S&P 500, however, had climbed to an almost five-month high above 6%, according to IHS Markit. So it’s possible traders covering shorts on the $291 billion SPDR S&P 500 ETF Trust (SPY) added some fuel to this rally, but the futures positioning and other data suggest it’s of minor impact.

The Usual Suspect Short-Covering Is Innocent in This Stock Rally

Technology shares helped lead the charge Wednesday, up the most since April as a group. It’s safe to say that many investors who expected a “blue wave” election to trigger a rotation into banks, industrial companies and other types of cyclical and value stocks got caught on the wrong foot.

CFTC data does show that traders moved into a net short position on Nasdaq 100 e-mini futures last week, but it was modest in size at less than 500 contracts. Short positions on both the Invesco QQQ Trust Series 1 and the Technology Select Sector SPDR Fund ETFs were nothing to write home about at a bit more than 2% of shares outstanding, according to Markit data.

The Usual Suspect Short-Covering Is Innocent in This Stock Rally

Short interests on the individual megacap tech stocks that contributed the most to Wednesday’s rally -- Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook Inc. and Alphabet Inc. -- are all minuscule, ranging from about 0.1% to 0.3% of free float, according to Markit.

And even the technology stocks that traders love to short aren’t showing signs of a squeeze. Goldman Sachs’s basket of the 20 tech stocks with the highest percentage of short interest is actually up less than the big tech ETFs.

The Usual Suspect Short-Covering Is Innocent in This Stock Rally

In other words, any attempt to attribute Wednesday’s market action entirely to a short squeeze falls a little ... well, short.

©2020 Bloomberg L.P.

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