NYSE Short Interest
According to Bloomberg, the market is the most short since 2008. Which is odd... because according to a report released this morning by UBS, while there are allegedly record shorts, the market is somehow, at the very same time, the most overbought since 2009.
Today, courtesy of JPM's Prime Brokerage, we can not only confirm that the move higher from the February lows was the biggest squeeze ever, but share a unique glimpse inside its mechanics, where something surprising emerges.
In a note released on Friday night, JPM's Nikolaos Panigirtzoglou has several important observations, the main of which is that CTAs and risk parity funds - which appear to have driven March’s equity rebound - are both significantly overweight equities. As a result he points to figure 2 below as an indication of a "more vulnerable equity market relative to a month ago, with all of the above types of funds currently overweight equities apart from discretionary macro hedge funds which appear to be still close to neutral."
Does this mean the short squeeze - whether ordinary course of business or engineered by banks to push the price of both the S&P and oil higher so that energy companies can sell equity and repay secured bank loans (as we speculated last week) - is over? According to JPM, not just yet, even though by now the weakest hands have clearly tapped out. In fact, since there has been virtually no rotation into ETFs, the most brutal part of the squeeze may be just ahead. Here's why:
In the last two months, NYSE Short Interest has risen 4.5%, back over 18 billion shares near the historical record highs of July 2008 (and up 7 of the last 9 months). There are two very different perspectives on could take when looking at this data...
While we still haven't taken out the all time highs said squeeze would lead to - there are about 30 points to go there; but as the following chart below shows, with just two trading days left, October is on pace for the biggest monthly point jump in S&P500 hi
"Three topics dominated our client discussions this week: (1) Hedge fund performance in the wake of the collapse in Valeant Pharmaceuticals (VRX) during the past five days; (2) cash return to shareholders, especially buyback activity; and (3) 3Q results."
"The Squeeze Has Run Its Course" - According To BofA "The Rally Needs Central Bank Action To Continue"Submitted by Tyler Durden on 10/19/2015 13:42 -0400
"This positioning squeeze should have now run its course. Both positioning analysis based on our proprietary flows and the CFTC data suggest that the market is now short USD and long risk for the yea. A further increase in risk appetite will depend on central bank action, starting with the ECB this week."
There are two ways of looking at the NYSE short interest, which as of September 15 surged by 1.4 billion to 18.4 billion shares or just shy of the level hit on July 31, 2008: one is that a massive short squeeze is about to be unleashed, sending the S&P500 to new all time highs; the other is that just as the record short interest in July 2008 correctly predicted the biggest financial crisis in history and all those shorts covered at huge profits, so another historic market collapse is just around the corner.
A recent survey of asset managers globally, managing USD 27.4 trillion between them, found that 78% of defined-benefit plans would need annual returns of at least 5% per year to meet their commitments, while 19% required more than 8%, "a target of 5% per year can be reached but only by using leverage, shorting, and derivavtives." And sure enough, as Deutsche Bank (DB) reports, in short, investors have rarely been more levered than today! According to DB, a MoM change in NYSE margin debt >10% has to be taken as a critical warning signal as there are astonishing similarities in the sequence of events among all crises. As the S&P 500 just hit a new all-time high, investors might want to ask themselves when it is a good time to become more cautious – yesterday, in our view. Simply put, the higher margin debt levels rise, the more fragile the underlying basis on which prices trade; with even a less severe sell-off in equities capable of triggering a collapse.
With the Fed no longer even pretending it is not all about the stock market, where some mysterious trickle down force is supposed to boost the economy the second the S&P hits new all time highs, and injecting billions into stocks via Primary Dealers courtesy of the daily now-unseterilized POMO (today's edition saw another $3.4 billion enter risk assets), there is apparently no reason to worry about anything. Sure enough, institutions don't need a second invitation to BTFD especially if they can do so on margin. According to the latest NYSE margin debt data, the December of margin debt used for various leveraging activities rose for the fifth consecutive month, reaching $331 billion - the highest since February 2008, when the market was declining, and back to the levels from May 2007 when the market was ramping ever higher to its all time highs which would be hit 3 short months later, and just as the subprime bubble popped.
As if the already documented record $220 billion year end equity market injection courtesy of deposits (being used by bank prop arms to invest in risk assets) was not enough to send markets into nosebleed territory to start the new year, which fully explains the institutional (note: not retail) capital flood into equity funds and ETFs as has been trumpeted every day for the past week by CNBC (we will update the retail data from ICI today), here is yet another reason why the 2012 to 2013 transition has everything to do with trading technicals and nothing to do with fundamentals. As the chart below shows, the reported level of NYSE short interest tumbled as of December 31, to 12.9 billion shares, a major 5% decline - the largest incidentally since December 30, 2011 - the lowest level since March, and a trend which has likely persisted as the shorts once again have thrown in the towel (except for Herbalife of course). Of course, this collapse in bearish sentiment, which goes hand in hand with the surge in NYSE margin debt to 5 years highs, is only sustainable if and only if the Fed has now fully eradicated all risk and all volatility in perpetuity. Which for now, judging by the epic ongoing smackdown in the VIX, is succeeding. That will change.
One place where the S&P level still does have a modest influence is the number of shorts in the market, which are strategically used by repo desks and custodians (State Street and BoNY), to force wholesale short squeezes at given inflection points, usually just when the bottom is about to drop out. The problem is that even short squeezes are increasingly becoming fewer and far between, for the simple reason that the Fed has managed to nearly anihilate shorters as a trading class with its policy of Dow 36,000 uber alles. This was demonstrated with the latest NYSE Group short interest data, which tumbled to 13.6 billion shares short as of the end of September, or the lowest since early May, just as the market was swooning to its lowest level of 2012 to date.
Those hoping that the recent short squeeze which took the market to just why of its 2012 highs will repeat itself may be disappointed, because according to the NYSE, Short Interest as of June 29 plunged to 14.2 billion shares, from well over 14.7 billion two weeks prior, a drop of over half a billion shares, or the most since January, when the combination of LTRO 1, Twist and renewed hope that the economy was "improving" forced 783K shares to cover into the big October-March ramp. The current short interest level of 14.2 billion shares is the third highest of 2012, and was last seen back in November 2011 when the market needed a global coordinated intervention and the ECB's LTRO announcement to prevent i from taking out 2012 lows.
... Nothing more (or less) than NYSE short interest as of June 15 (at 14.7 billion shares) soaring to the highest since October 2011, just before the mega ramp on the previously mentioned October 26, 2011 Greek "Bailout" started on another total non-event as history would show (as would be the ensuing global central bank interventions, and LTROs 1+2). This is also tied for the 3rd highest short interest since July of 2009. Which brings us to the following question: we know that over the past month the only stock "market" catalysts have been small groups of "educated" central-planners: the Fed, SCOTUS, and Eurocrats, with the only upside catalyst being taxpayer cash. Does the chart below mean that the only technical item that matters is Short Interest (as well as short interest in the highly levered and beta-rally inducing EUR), and every time this number rises above a given threshold the various Wall Street repo desks will merely engage in forced buy-ins and cause epic short squeeze like the one today? We don't know. However, we do know that with both long-side and short-side trading becoming meaningless and everything now just an HFT-facilitated stop hunt, this is the surest way to make sure nobody is left trading these markets anymore, something which relentless ongoing cash outflows from equity funds confirm every single week. The good news: once the weak hands have covered, a new wave of shorts can reenter, only to be burned as well on the next overhyped non-event out of Europe or anywhere else.