Russell 2000

Out of the gate and then again soon after the EU close, shorts were forced to cover this morning but in the last few minutes, the 'most shorted' names in the Russell 2000 have plunged...

As reported on Friday, the most recent example of a breach in informational Chinese walls was confirmed at Bloomberg, where it was discovered that reporters have the same degree of client surveillance as workers on the API/terminal side. The reason why this is problematic is that since Bloomberg is a monopolist in the financial terminal industry, with such competitor attempts as Reuters' Eikon being massive failures, virtually every finance professional needs a terminal (even if the rate of sale of such terminals is slowing down as a result of the ongoing financial margin headaches). Which means that Bloomberg journos, an increasingly competitive service to the likes of Dow Jones, Reuters and AP, may have had an unfair advantage when it comes to tracking their "pray" - Bloomberg's own clients. And now, following the original Goldman complaint which Bloomberg said ended such informational commingling, it is the turn of the Treasury and the Fed (certainly very heave users of the BBG Trading terminal) to complain. What is left unsaid in all of this is the simple question of just why is it material information what the Fed, arguably an entity that at least in a normal world should not have any day to day trade interactions with financial markets, looked up on its trading terminal.

There is a term for when asset prices become detached from fundamentals, it’s called “A BUBBLE.”

The market is beyond overstretched at this point on a short-term, intermediate term, and long-term basis. The sheer number of warning signals is staggering.

In the last five days, the 'most-shorted' names in the Russell 2000 index have surged over 7.3% from their lows. During the same period, the index itself has managed a still-impressive 2.4% gain. The epic triple-beta dash-for-trash continues to rage and tear the faces off every short who dare use reasonable valuation (macro- and micro-) perspectives to make investment decisions. When will it end?

The 'most shorted' names in the Russell 3000 are up a remarkable 1.4% today compared to 0.45% in the index itself. The short-squeeze off the NFP gap-down lows is impressive indeed. From the open last Friday, the 'most short' names are up 6.6% against the index up only 3.5% as the dash for trash continues in the face of increasingly dismal data. The last 2 times that the 'most short' index was this squeezed relative to the index was late-December (before the equity dip) and mid-Fed (before the equity dip). Just as we warned here and here, the inexorable flow of easy money means the dash-for-trash (as remarkably ridiculous as it seems - though as now know nothing is allowed to fail ever again) has been the winning trade; though as we note below, there is a limit to the 'squeezability' and we appear to be there in the short term.

The 'down-up' streak is over, long live the next streak. Precious metals had a big day with Silver and Gold surging 1-2% (among the biggest moves in 7 months); Treasuries pushed higher in yield from the open but faded rapidly into the close to end unchanged ay 1.75%; Commodities in general were bid on the back (supposedly) of China's lower inflation print; IG credit was bid while HY credit (spreads not the HYG ETF) rolled over into the close. What was most evident was the total and utter failure of the 3:30pm Ramp - it seems our discussion of the farce last night brought a world of front-runners to the game and ruined the Algos day as instead rallying S&P 500 futures dropped 4 points in the last 30 minutes - this is the biggest 3:30-to-4:00 loss in six week (and 3rd biggest of year). The world was celebrating another new all-time high in the Dow and the S&P gave back half its gains to close +4 points; but the Dow Transports closed -0.3%, and the Russell 2000 (for so long Bernanke's policy tool) ended -0.23%.

The big driver of market declines Friday was led by the Non-Farm Payrolls report. The jobs data was a dreadful miss which leads to the major “disconnect” we’ve been seeing between stock prices and overall economic data which we posted just last week. This is the nagging and confounding reality of the QE and ZIRP grand experiment for many investors.

It all looked great as we held the overnight rampathon (driven by EURJPY fiddling) into the US open and yay verily, the media was celebrating (and kept their exuberance going til the close with the Dow at another all-time closing high). The S&P was amusingly (and oh so humanly) bid 7 points vertically into the close to ensure a VWAP close in the futures (and another new closing high for the S&P) as the Nasdaq bounced perfectly off unchanged from Cyprus levels. But away from that idiocy, things were not so great. Builders were battered out of the gate (-2.4% on the week); The Dow Transports never saw green all day dropping 1.3% (and now down 3% post-Cyprus) and while the broad Russell 2000 opened gap up (like the rest) it was slammed slower all day and ends -2% from pre-Cyprus (while the Dow, S&P, and Nasdaq hold 0.5-1% gains). Silver was monkey-hammered (on no news whatsoever - and record US Mint demand) down 4% on the week and gold slipped ending -1.3% (even with the USD retracing yesterday's weakness to close unchanged on the week). Treasuries drifted higher in yield with 7Y underperforming (but only unch on the week). VIX compressed but remains considerably dislocated from stocks' exuberance.

Worried about potential bankruptcy next week, buy the stock. Concerned at slumping top- and bottom-line misses, buy the stock. Regulatory oversight, buy the stock. Over-leveraged, buy the stock. Fortress-like balance sheet, not so much... Since the mid-November lows at the start of this liquidity-fueled rally de luxe, the most-shorted names in the Russell 2000 have risen an impressive 27% - even more impressive is that this is a 1150bps outperformance over the index itself. As we warned a few times, the list of most-shorted stocks is often a place to find epic (and ridiculous) returns but with our macro hats on for one second, if this kind of 'capital' is flooding into these kinds of companies - we can only imagine the landscape of mal-investment that will be exposed if and when the tide ever ebbs even modestly. For now, the dash-for-trash continues - though today is the first 2-day drop in 3 weeks (but still outperforming the not-most-shorted names).

The Chinese PMI may be slowing down (first HSBC, official one coming out soon), but why bother when according to MarkIt it is now the US' turn to carry the torch of economic growth, reality notwithstanding. As the just released Chicago PMI indicated, in February the broad index rose to 56.8, higher by 1.2 points and beating expectations of a 54.0 print. It is only logical that with the rest of the world in contraction mode, and China about to enter, that the US would have the highest print in 11 months (or Q1 2012, when US GDP was just a tad higher). Or not. Remember: it is all about playing along the script that always, at some place, there is at least some growth taking place. That said, while last month cojoined PMI and Mfg ISM were flipped, as has happened nearly every month in the past year to keep everyone baffled with BS, today's PMI beat likely means that the Manufacturing ISM will be a miss, which according to GETCO's algos will be just as positive for stocks, as today's beat.

In plain terms, the stock market has become totally detached from economic realities. There is a term for when asset prices become detached from fundamentals, it’s called “A BUBBLE.”

While yesterday's biggest S&P drop of the year to date, and today's risk off continuation, is merely a modest response to the completely baseless fear that the Fed will no longer create free beta for everyone, to most liquidity-addicts it is merely a chance to "BTFD." So for the benefit of those who just can't wait for the momentum to return (in a world where fundamentals are completely meaningless as a result of the Fed's soon to be $4 trillion balance sheet and only momo and hope-based strategies remain), we provide our quarterly update of the most hated stocks as represented by the percentage of short interest relative to float. Because as the recent Herbalife saga has shown, the only residual strategy from the Old Normal in a time when the only thing matters is what direction the Fed chairman sneezes, is to force epic short squeezes not based on fundamentals but purely on stock technicals and massive short overhangs.

We have noted the incessant slamdown in the precious metals markets, and highlighted that the only thing that can slow the flood of liquidity into each and every market is a rise in energy prices. The former represents 'trust' in the system; the latter represents 'real economics' as it squeezes the global economy forcing the central banks to pull back or tighten (see China's lack of rev repo recently). To wit, we just noted the plunge in WTI this morning; but Nanex, given their depth of data, noticed something considerably more concerning... "Because the circuit breaker tripped after the market had somewhat stabilized, we think another large sale appeared that would have decimated prices - which CME's circuit breaker logic picked up on, causing the halt." Did someone intentionally try to crash the WTI Crude contract? And if so, who? We don't know, but the usual suspect (singular) does emerge, considering that with gas prices hitting new February daily record every day, and every dollar in increase in WTI means even less (seasonally adjusted) GDP, and less consumer purchasing power, those evil speculators who are taking the Fed's free money to buy commodities (and very unpatriotically not the S&P or Russell 2000) must be promptly punished.

While everyone is very familiar, and at times hypnotized, with the plain vanilla equity chart of stock prices which at least in the US are near all time highs, and where the small-cup Russell 2000 - long the object of Bernanke's affection - is already at never before seen levels, one chart virtually nobody has seen, perhaps the most important chart for the global capital markets right now, is the following from Goldman, which shows that while outright market cap for the G7 countries (ex basket case Japan) is near all time highs courtesy of the $15 trillion in liquidity pumped by central banks, the ratio of equity market cap to the outstanding value of debt securities underlying this equity is near all time lows!