Bets That the Stock Market is in for a Rough Ride are Rising

Bear populations have been growing in the wild lately, but nothing like they’re seeing on Wall Street today.

The sleuth of investors taking out short positions against the stock market, which mounted a respectable rally this summer until things turned bearish again in the past two weeks, hasn’t been this large since the onset of the pandemic in 2020.

True or False Grit

The S&P 500 is up 11% since the year’s June low, powered by strong earnings among key corporates and strong employment numbers in the face of a litany of woes (energy markets, war, supply chains, the pandemic). While some believe the rally can be sustained, the blue-chip index has had two weeks of losses and is still down 15% for the year after a brutal start, leading others to believe the comeback will be short-lived.

Pessimism, in other words, is back in vogue:

• Over 260,000 short positions were taken out on the S&P 500 futures contract as of Tuesday, according to Commodity Futures Trading Commission data reported by The Wall Street Journal. That figure, which shows investors betting that the S&P 500 Index’s future value will fall, is close to its June 2020 peak.
• The technology-heavy Nasdaq 100, a bellwether for strong growth in the bull market of the previous decade, is also under pressure. The Invesco QQQ Trust exchange-traded fund, which measures the index that counts Amazon, Apple, and Meta among its members, has seen the largest number of short positions recently taken of any ETFs, according to data analytics firm S3 Partners — the short interest in the ETF increased $5.4 billion, or 28% to $25 billion, in the 30 days to August 24.

“There’s so much skepticism, so we’re still in the sell-the-rally mentality,” Mark Hackett, chief of investment research at Nationwide, told the WSJ. “If everybody feels we’re in a bear market rally, it will almost become a self-fulfilling prophecy.”

Words to Skid By: On Friday, US Federal Reserve Chairman Jerome Powell was adamant that the central bank must continue raising interest rates to combat inflation, something he said “is likely to require a sustained period of below-trend growth.” Markets fell over 3% on the day alone, in large part because of the warning.

Never Gonna Give You Up: Retail investors have not given up hope. Inverse ETFs — which allow people to short an index’s performance by profiting when they go down — have been falling for several weeks, according to VandaTrack data. It’s like Buzz Lightyear says, “To infinity and Bed Bath & Beyond.”