The seemingly endless coronavirus crisis economic lockdown has forced some investors to revive their wagers against the stock market, taking their most aggressive positions in years.
Bets against the SPDR S&P 500 Trust, the biggest exchange-traded fund tracking the broad index, rose to $68.1 billion last week, the highest level in data going back to January 2016, the Wall Street Journal reported, citing data from financial analytics company S3 Partners. That was up from $41.7 billion at the beginning of 2020 and $41.2 billion a year ago.
Short sellers borrow shares and sell them, hoping to repurchase them at lower prices and keep the difference as profit, WSJ.com explained.
Among the companies short sellers have targeted in recent weeks are travel-related firms, including Carnival Corp. (CCL), Royal Caribbean Cruises Ltd. (RCL), Marriott International Inc. (MAR) and Wynn Resorts Ltd. (WYNN).
“We’ve really seen a significant bounceback in the last three weeks at levels that I think are too quick,” said Jerry Braakman, chief investment officer at First American Trust. His firm recently bet against the Nasdaq-100, on the belief that technology stocks have fallen too little to reflect the probability of a recession. The index is up 1.1% in 2020.
“When we see a strong move in one direction, where we think the fundamentals and the news can turn ugly, especially during an earnings cycle, we think that’s an opportunity where we could see a 5, 10% selloff again,” he said.
Meanwhile, Wall Street's main indexes have rallied this month, with the S&P 500 ending Friday with its biggest two-week percentage gain since 1974 on a raft of global stimulus and hopes the virus was nearing a peak in the United States.
The Nasdaq also registered its best two weeks since 2001, powered by new record highs for Netflix Inc. and Amazon.com Inc. - deemed "stay-at-home" stocks as widespread lockdowns fueled demand for online streaming and home delivery of groceries, Reuters explained.
Still, the benchmark S&P 500 is about 15% below its all-time high and analysts have warned of a deep economic slump from the halt in business activity and millions of layoffs.
"There's an early street consensus this morning that risk has run too far, too quick," said Stephen Innes, chief global markets strategist at AxiCorp.
"With several 'stay-at-home' names trading at or near year-to-date highs, the risk for a round of profit-taking might be on the cards ahead of S&P 500 earnings reports this week."
Hopes have also risen for a gradual reopening of the economy after President Donald Trump cited signs of plateauing in the virus outbreak last week and outlined new guidelines for states to pull out of shutdowns.
But his plan was thin on details and left the decision largely up to state governors.
"The recovery will be much slower than the market is currently pricing in simply because social distancing measures can be relaxed but not removed until we have a vaccine or a very effective cure," said Andrea Cicione, head of strategy at TS Lombard in London.
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