| The biggest risk for a further squeeze… | | The biggest risk for short-sellers right now is probably “sentiment” (everyone is bearish) and “positioning” (there has been a lot of selling). Let’s examine 3 different cohorts of the investment community below. The conclusion? It is not as bad as one might expect… |
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| Hedge fund positioning | | Equity long/short gross and net at 0%-tile on 12m lookback and single digit %-tile on 5-year lookback. That is pretty “clean”…. |  JPM Prime Brokerage |
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| But they have been buying lately | | The Goldman Sachs Prime Brokerage book (that is, their hedge fund clients) was modestly net bought for the month of May, driven by risk-on flows with long buys outpacing short sales; suggesting that hedge funds were not large sellers of equities amid the market turbulence in recent weeks. In addition, managers appear to have started positioning for upside risk thru buying Macro Products (Index and ETF combined), which is in sharp contrast to Single Stocks that continued to be net sold driven by short sales. Pretty interesting that the selling has stopped and the whole month of May actually has seen risk-on, albeit small (GS PB) |
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| One of the largest gross reductions ever seen | | Morgan Stanley’s PB Strategic Content Team note that last week ended as one of the largest they’ve seen this year in terms of gross reductions, which was in large part due to Thursday’s covering as global equities rallied higher. Notably, this was the first week in 2022 where funds tilted towards both covering shorts and selling longs (was the 3rd largest week of long selling YTD of global equities, and the 2nd largest of covering). (Morgan Stanley) |
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| Hedge Funds in over their ski’s short-term? | | Yesterday, HFs had -17% sell skew which is 98th percentile over previous 52 weeks. Goldman’s PB data below shows HF positioning creeping higher…did this community get over their ski’s during FOMO bid last week? Yesterday’s flow tells us an empathic yes to that question. In this tape HF buyers live higher not lower which is not a healthy dynamic (GS trading desk) |
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| Systematics in the short term: buyers in all scenarios | | CTAs bought $2b S&P last week and are now short -$18b S&P. Long term Momentum now positive (north of 4076) and short term momentum flips positive north of 4161 (keep an eye on this level). Medium term momentum trigger higher up at 4319. CTAs are S&P buyers this week in all 3 mkt scenarios…(GS trading desk) |
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| $500bn of systematic buying upcoming…? | | Kolanovic being Kolanovic, managing to get bears agitated and nervous…: “Positioning of systematic and discretionary investors got near multi-year lows (HF beta, VT, and RP approximately 5th %ile), and sentiment to multi-decade lows (see here). As volatility normalizes—and there are signs of declines in both rates and equity volatility (e.g., decline in MOVE index, lower negative equity convexity/short gamma, decline in bond-equity correlation)—we believe it will result in systematic inflows and re-risking of various groups of investors (e.g., volatility-sensitive investors could add ~$500bn)” (JPM Cross-Asset) |
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| Retail Army: retreat completed | | Call options trading among retail investors has fallen to lowest level since December ’19, completely reversing the surge in activity since the pandemic began. |  OCC |
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| More on Retail Army | | 1. Retail buyers returned after two weeks’ absence and injected a net inflow of $2.8B into the market this past week, in line with the 1Y average. 2. The bulk of the inflow continues to be concentrated in ETFs (+$3.0B), and single stocks experienced net selling (-$184MM). 3. At the single stock level, large cap tech companies are back in favour with retail. Among the most bought securities, we find AAPL (+$223MM), TSLA (+$133MM), AMZN (+$112MM), NVDA (+$110MM) and MSFT (+$61MM). (JPM Retail Radar) |
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| Retail Army option traders say the squeeze has gone too far | | “In the options space, retail traders sold $1.0B in delta and, for the first time in eight weeks, net sold gamma to the tune of $425MM. Most notably they bought puts and sold calls on SPY, likely taking profit following the market rally” |  JPM Retail Radar |
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| Deleveraging has already taken place | | At least when it comes to the young hot retail trader. JPM writes: “Both our leverage metric based on NYSE margin accounts and the small traders’ call option flow suggest that the deleveraging by the younger cohorts’ of retail investors has advanced by so much that all the previous post pandemic increase has been unwound already.” |  JPM |
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