According to JPMorgan, short bets against funds that track major US indexes have reached an all-time low. This decline in short selling can be attributed to three main reasons. However, the low levels of short-selling could potentially lead to market volatility in the event of negative news.
JPMorgan noted that the continuous surge in the US stock market has made short selling a challenging trade. As a result, bets against US indexes have significantly decreased. The bank stated that the short interest in funds that track the S&P 500 and Nasdaq has dropped amidst their record-breaking highs this year.
Analysts at JPMorgan, led by Nikolaos Panigirtzoglou, explained that the diminishing short interest in SPY and QQQ ETFs has been providing consistent support to US equities over the past year, effectively dampening volatility. They described this phenomenon as an implicit short vol trade.
Overall, JPMorgan highlighted the decline in short interest on the SPY and QQQ ETFs, indicating a trend of reduced short selling in the market.
The market has become extremely challenging to trade against due to three key factors, according to experts.
Firstly, maintaining short bets has become expensive as stocks and funds continue to rise. This risk is particularly relevant in the current bullish market, driven by excitement around artificial intelligence, potential interest rate cuts, and a resilient economy. This has resulted in a trading frenzy, with the S&P up nearly 15% year-to-date and the Nasdaq posting a significant gain of 32.3%.
Secondly, regulators have imposed restrictions on short selling by enforcing transparency requirements and increasing costs for those targeting equities, as noted by JPMorgan.
Lastly, industry players are increasingly withdrawing from the market as they face a growing wave of retail investors. The famous meme rally of GameStop in 2021 serves as a prime example of this trend.
In a letter last November, renowned short-seller Jim Chanos acknowledged that the long/short equity business model has been facing challenges and interest in fundamental stock pickers has diminished. JPMorgan further notes that short positions are also disappearing from individual stocks, particularly in the top seven leading equities. This withdrawal has bolstered the equity market’s impressive rally, but it may also signal potential trouble ahead. Analysts warn that the current low level of short interest poses a vulnerability to US equities if negative news were to reverse the decline in short interest seen over the past year.
Despite not being explicitly mentioned by JPMorgan, analysts have been cautioning about several factors that could negatively impact the market. These include the possibility of prolonged high interest rates, a revival of inflation, a decline in earnings, or a geopolitical crisis. You can find the original article on Business Insider.