JPMorgan Predicted a Short-Covering Surge, and It Has Arrived

(Bloomberg) -- The S&P 500’s 7.5% advance on Tuesday has hallmarks of a scramble to close bets against hated parts of the equity market as Congress hones a plan to shield the economy from the coronavirus.

It conforms with predictions in a note earlier today by Nikolaos Panigirtzoglou, JPMorgan Chase’ global market strategist. “We expect equity markets to see considerable short covering from here if the impact from the virus turns out to be less long-lasting or that measures taken by policy makers to support demand prove larger in magnitude than the equity market envisages,” he wrote.

Short interest in the SPDR S&P 500 ETF Trust is beginning to roll over, he added, and “there are even bigger shorts to be covered in stocks outside equity ETFs.”

A look at the composition of the equity gains affirms this dynamic is in full bloom.

A Goldman Sachs-compiled basket of American companies with the most bearish bets was up by a double-digit percentage at noontime in New York, on track for its best day since 2012. This index includes the likes of Bed Bath & Beyond Inc., Beyond Meat Inc., Cleveland-Cliffs Inc., and Yeti Holdings Inc.

Firms with strong balance sheet have been favored by investors betting that fortress-like fundamentals will prove a relative port of safety amid macroeocnomic turbulence. But it’s the companies with weak balance sheets that are on a tear today, outperforming their healthier counterparts by the most since November 2016. That’s a stark reversal of a trend in which better balance sheets bested weaker ones by 12 percentage points since the S&P 500 Index peaked on Feb. 19 heading into Tuesday’s session.

Profitability has also been prized by investors as an indicator of high-quality business models that will withstand the coming storm. On Tuesday, however, this is the worst performing equity factor. The best? Beleaguered value and high-volatility factors.

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