Short Sellers Vindicated Again With Bear-Market Rally Sputtering

Order has been restored to the world for bearish traders, with their favorite targets under pressure again after surging during the recent equity rally.

Stocks with the heaviest short interest dropped 3.5% Tuesday, more than double the losses in the S&P 500, going by thematic baskets compiled by Goldman Sachs Group Inc. In what may be a sign bears are reloading, Russell 3000 shares with the highest quintile of short sales trailed those with the lowest more than 2 percentage points, according to data compiled by Bloomberg.

The retrenching came as a four-day slide dragged the S&P 500 back below its 200-day moving average amid concern that stronger-than-expected reports on the US labor market and services industry would force the Federal Reserve to stick to its aggressive pace of tightening to tame runaway inflation.

The renewed selloff is a vindication for hedge funds that, according to Wall Street’s major prime brokers, added to bearish wagers last week in the face of market gains. While prior bouts of rising bearishness like this have given way to short squeezes this year, this episode reflects growing angst ahead of next week’s inflation reading and Fed’s final policy decision of 2022.

“Few HFs see much upside at current market levels and are perhaps looking to trade the range,” JPMorgan Chase & Co.’s team including John Schlegel wrote in a note to clients Friday. “Positioning levels still appear fairly low on a longer-term basis (which could support a rally), but they’re not as low as they were at the end of September to argue that the market will keep shrugging off bad data points.”