Bearish stock bets surge the most since March as volatility emboldens short-sellers

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  • Short interest in individual US stocks leaped the most since March last week as volatility rocked investor sentiments, JPMorgan said in a Tuesday note.
  • Bearish positioning increased to just above 7% of all US stocks available for lending last week, the highest level since July. The metric sat at roughly 6% at the end of August.
  • The rise in short activity “is a worrying development, especially for US stocks where the short base still stands at rather low levels,” strategists led by Nikolaos Panigirtzoglou said.
  • Still, the bank’s other gauges for bearish interest show stable levels for SPY ETF shorts and growing optimism toward stock futures.
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Short-sellers are rushing back to the stock market after the summer’s rally gave way to choppy price action, JPMorgan analysts said Tuesday.

Bearish stakes jumped above 7% of all US stocks available for lending last week, the highest level since July and the biggest increase since March’s market plunge, according to the bank. The gauge sat at roughly 6% in August as major indexes repeatedly notched record highs.

Short positions on non-US stocks saw a smaller climb but sit at just below 9% of all available shares.

“The recent rise in the short base at individual stock levels is a worrying development, especially for US stocks where the short base still stands at rather low levels,” strategists led by Nikolaos Panigirtzoglou wrote in a note.

The overall trend suggests de-risking among investors, and there is room for the short base to increase further considering it still sits well below pre-pandemic levels, the team added.

Read more: Morgan Stanley’s US equities chief nailed his call for a short-term market meltdown. He now lays out the evidence that it may not end soon, and shares 15 stocks to buy ahead of the rebound.

The data also points to shifting sentiments following the introduction of fresh volatility through September. Major indexes sank earlier in the month when investors ditched tech giants’ high-flying valuations and looked for value elsewhere. Though sell-offs have since moderated, volatility remains at heightened levels and indexes are far from retaking their early September peaks.

Still, not all areas of the market are taking on more bearish bets. JPMorgan’s broader proxy of short interest – which tracks the proportion of SPY US Equity ETF shares available for lending – remains stable after dropping through the summer. A separate proxy tracking asset managers’ and leveraged funds’ positions in US stock futures has jumped in recent weeks, indicating more bullish outlooks among institutional investors.

The team maintains its own optimistic forecast for stocks moving forward. While hopes for stimulus are all but dashed and the US economic recovery shows some signs of slowing, there’s ample cash on the sidelines ready to push stocks higher, according to the bank.

“We see plenty of upside in equities in the medium-to-longer term given still low overall equity positioning,” the strategists said.

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