Prior To CPI, Earnings, Hedge Funds Boost S&P Shorts To Decade Highs

There is a new wave of hedge fund employees reloading bearish bets on US equities, betting it is going to continue to fall despite worsening economic data and a slowdown in corporate profits.  

‍

Based on data from the Commodity Futures Trading Commission, large speculators, mainly hedge funds, have increased their net short positions in S&P 500 e-mini futures to roughly 321,000 contracts in the last two days. Following the downgrading of the US credit rating in November 2011, this was the most bearish reading since November 2011. 

‍

It is also encouraging to note that data from JPMorgan Chase & Co.'s prime broker unit shows a similar pattern. Last week, hedge fund clients of the bank were raising bearish bets against shares of Wall Street firms and exchange-traded funds. 

‍

As well as the long side of the book, there is a growing bearishness that can be observed. According to Goldman Sachs Group Inc.'s prime brokerage unit, hedge funds have turned into sellers after chasing a rally in technology shares for more than 15 months, unwinding their long positions at the fastest pace in 15 months. 

‍

The data on manufacturing and services have added to fears that an economic recession could hit soon, so fears of an economic recession have grown over the durability of 2023's equity advance. Bears are betting on a bad earnings season triggered by widely-watched inflation data due on Wednesday and banks on Friday.

‍

The JPMorgan trading team, including Andrew Tyler, wrote to clients that investors remain bearish and that the recession narrative dominates as bad news is treated with severity. Unless earnings change materially, the SPX is expected to range from 3,800 to 4,200, based on investor conversations. 

‍

Markets may bounce once again due to prevailing caution, as they have done since last October. As a result, when almost everyone predicted that stocks would reach new lows in 2023, the S&P 500 rallied instead, spurring equity gains that forced short sellers to cover positions and others to catch up. Economic data was better than expected, causing equity gains to erupt instead. 

‍

It is likely that the S&P 500 will continue to trade in a narrow band on Monday amid defensive positioning. A rise in Treasury yields amid expectations that the Federal Reserve will raise interest rates again in May led to stock losses for the third straight session. The S&P 500 traded in a 10% range during the first quarter, its smallest range since September 2021.

‍