Bears are going extinct in stock Market’s $13 Trillion Rebound

Skeptics are a dying breed in American equities. It’s another illustration of how risky it has become to doubt the resilience of the market $13 trillion surges since late March.

Going by the short positions of hedge funds, resistance to rising prices is the lowest in 166 years. Bears pulled out as buying surged among professional investors who were forced back into stocks despite a recession, stagnating profits and the prospect of a messy presidential election

While perhaps logical given open-ended Federal Reserve support, rampant covering depletes at least one source of support for shares buying for speculators who sold them short. Virtually every constituency in the market has gotten more bullish as the S&p 500 surged 52% in five months. In the past 21 sessions, there hasn’t been a drop of 1%, the longest stretch since January.

The repurchase of those short shares has been a factor that has contributed to the rally that we’ve enjoyed. It will certainly be a weaker force going forward because mathematically it’s just simply a smaller quantity of outstanding shares that are still short.

The S&P 500 added 0.7% over the five days, notching its fourth straight weekly win. It exceeded the FEb.19 record high on Tuesday to cap the fastest bear-market recovery in history. The Russell 2000 index of smaller companies fell 1.6% while DowJones Industrial Average was virtually flat. The Nasdaq 100 performed better, climbing 3.5%.

Steamrolled by a rally whose velocity us the strongest in decades, bears are giving up. At the start of August, the median S&P 500 stock had outstanding short interest equating to just 1.8% of market capitalization, the lowest level since at least 2004, data compiled by Goldman Sachs Groups in show All major sectors except energy saw bearish bets sitting in the bottom decile over the last 15 years.

an example of why, look at Tesla, the electric carmaker who shares have surged almost 400% this year. At near 4.5% of total shares available for the train, its short interest has fallen to a record low, down from a high of 209% a year ago, according to His Markit data. Other examples where beats have been thwarted are Twilio Inc., Lumper Liquidators Holding Ic. And Peloton Interactive Inc.

It looks like all those fund managers over the past quarter went from being bearish to expecting a stock market crash to now being bullish, “Sentiment turned positive about equities in general but also sentiment is turning positive for a return to growth.

The tide is getting harder to fight with retail investors flocking to unprofitable companies such as Nikola Corp. and Mordena Inc. More money managers are forced to embrace the rally, ignoring this year’s profit contracting and banking on fiscal and monetary stimulus. At 26 times forecast earnings, the S&P 500 was trading at the highest multiple since the dot-com era.

Rallying stocks are bad for bears and that frequently pushes them out of the market at times that might be ripe for skepticism. Consider the internet frenzy 20 years ago. Back then large speculators, mostly hedge funds, were net short on S&P 500 futures in all but five weeks in 1998 and 1999. Those mostly losing bets were completely squeezed out in 2000. That’s when the crash came.

The impact short covering is particularly pronounced this time. A Goldman Sachs basket of the most hated stocks has almost doubled since the market’s bottom in March, again that’s near twice as big as the S&P 500’s.

The recovery from the 2020’s bear market has emboldened bulls among trend- following trades in particular, according to Charle McElligott, a cross-asset strategist at Nomura Securities. The firm’s model that tracks commodity trading advisors showed the group went max short on global equities futures on March 9 and has since seen $700 billion worth of short positions covered to now be net long.

After a five-month, uninterrupted rally, the market is starting to show signs of fatigue. While the S&P 500 those in a court of the past five days, none of the gains topped 0.5%.

It felt more like a lack of desire to sell rather than enthusiasm to buy except for some select rotation pockets of the markets that are still attracting speculators. We will still just have to see if the S&P 500 hitting new high wakes the market up and entices some new buyers to enter.