Hedge funds are reloading on bearish wagers on US equities, betting the latest market retreat will persist amid worsening economic data and corporate earnings.
Large speculators, mostly hedge funds, saw their net short positions in S&P 500 e-mini futures increase to roughly 321,000 contracts as of Tuesday, according to data from the Commodity Futures Trading Commission. That’s the most bearish reading since November 2011 following the downgrade of the US’s sovereign credit rating.
Data from JPMorgan Chase & Co.’s prime broker unit showed a similar pattern, with the firm’s hedge fund clients last week raising bearish wagers against exchanged-traded funds and financial shares.
Rising bearishness is also evident on the long side of the book. After chasing a rally in technology shares, hedge funds have turned into sellers, unwinding their long positions in the industry at the fastest pace in 15 months, according to Goldman Sachs Group Inc.’s prime broker unit.
Skepticism has grown over the durability of 2023’s equity advance as data on manufacturing and services has added to fears an economic recession could come soon. And with the widely-watched inflation data due Wednesday and banks on Friday kicking off what’s forecast to be the worst earnings season since the depths of the pandemic crisis, bears are doubling down on their bets.
“Investors remain bearish, and the recession narrative was the dominant narrative last week as bad news was treated as bad news,” JPMorgan’s trading team including Andrew Tyler wrote in a note to clients. “Investor conversations reveal an SPX range of 3,800 – 4,200 unless we see a material change from earnings.”
To be sure, prevailing caution may again set the stage for a market bounce, as has been the case since last October. To wit: when almost everyone came into 2023 preparing for stocks to reach fresh lows, the S&P 500 rallied instead as economic data came in better than expected, sparking equity gains that forced short sellers to cover positions and others to play catch-up.
Amid defensive positioning, the S&P 500 continues to trade in a narrow band with the benchmark index sitting near 4,100 on Monday. Stocks pulled back for a third session in four as Treasury yields climbed amid expectation that the Federal Reserve will raise interest rates again in May. During the first quarter, the S&P 500 was stuck in a 10% trading range, the smallest since the period ended in September 2021.
“It increasingly feels like equities are caught in a channel. One that most believe (and are positioned) to see break on the downside and yet never seemingly does,” Bobby Molavi, a managing director at Goldman, wrote in a note Friday. “The prevalent view seems to be that more things will break on the back of rapid rise in cost of capital.”
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