HomeBusinessThe disappearance of short sellers has helped push stocks to record highs....

The disappearance of short sellers has helped push stocks to record highs. But beware of a sharp negative reversal, JPMorgan says.

A stock trader at work on the New York Stock Exchange on February 24, 2020.Johannes Eiselle/Getty Images

  • Short bets on funds tracking major US indexes have fallen to a record low, JPMorgan said.

  • There are three main reasons why short sellers withdraw from the market.

  • Low levels of short selling can lead to market volatility when negative news emerges.

Nonstop highs in the U.S. stock market have made short selling a difficult trade, and bets on U.S. indexes have plummeted, JPMorgan said in a note Thursday.

With the S&P 500 and Nasdaq hitting a series of record highs this year, short interest in funds that track the indexes has fallen, the bank said.

“The declining short interest on SPY and QQQ ETFs to successive record lows has provided a steady stream of support to US stocks over the past year and helped suppress volatility, acting as an implied short vol trade,” said analysts led by Nikolaos Panigirtzoglou .

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Short interest on the SPY and QQQ ETFsShort interest on the SPY and QQQ ETFs

JPMorgan

According to them, three key factors have made this a particularly difficult market to trade against.

First, short bets are expensive to hold when a stock or fund is rising, a risk that is especially relevant in the current bull run. Excitement about artificial intelligence, the potential for interest rate cuts and a resilient economy have all contributed to a trading frenzy.

As a result, the S&P is up nearly 15% this year and the Nasdaq has posted a 32.3% gain.

Second, regulators have added restrictions on short selling, mandating transparency and raising fees for short sellers targeting stocks, JPMorgan said.

Finally, industry players are increasingly retreating as they face a growing wall of committed retail investors, with Gamestop’s famous 2021 meme rally being the best example.

“It is no secret that the long/short equity business model has come under pressure and interest in fundamental stock picks has waned,” famed short seller Jim Chanos wrote last November in a letter explaining why he left the company left.

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According to JPMorgan, short positions are also disappearing from individual stocks, with a clear decline in the top seven leading stocks.

While this pullback has supported the stock market’s rise, it could lead to problems in the future, the bank added.

“Given how low their short interest rates are right now, this implied short full trading appears quite extensive by historical standards, creating a vulnerability for US equities in a scenario where negative news begins to reverse the decline in short interest rates over the past year” , analysts wrote.

Although not mentioned by JPMorgan, analysts have been warning of some market-busting news for some time. That includes the prospect of longer interest rates, a resurgence in inflation, earnings declines or a geopolitical rift.

Read the original article on Business Insider

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