Morgan Stanley: "Most Of The Buying Has Come From Shorts Covered Rather Than Longs Bought"

Tyler Durden's picture


Confirming what we explained recently, Morgan Stanley explains that among its equity long-short fund activity, the short activity (the net of shorts added and shorts covered) reached a minus-2 z-score indicating massive covering over the past 20 days. The last 3 times this occurred were April 2010 (S&P then fell 13% in 8 days), July 2011 (S&P then fell 19% in 23 days), and Oct 2011 (S&P then fell 10.5% in 20 days). Across sectors, Consumer Discretionary has been the most covered over the past week and month. Due to heavy covering, Discretionary short activity fell below a minus-3 z?score as of yesterday (now the highest long/short ratio of all sectors). It is worth keeping in mind, MS add, that historically speaking, the sector with the highest long/short ratio has often gone on to underperform over the following 6?12 months. This covering has driven median net leverage up to 64% (its 97th percentile of post crisis levels).

Money-on-the-sidelines!! not so much... Massive short-covering rally - yes...

Quoting from MS' John Schlegel:

L/S funds have been consistently covering over the past month, which has driven gross lower and net higher.


One way we measure long and short activity is by looking at the activity z-scores on a rolling basis where the past 20 days’ cumulative activity is compared to all 20-day rolling periods over the past 12 months. On this basis, the short activity z-score reached -2 as of this week, indicating significant covering by L/S funds. Other times we’ve seen a minus 2 z-score: late April 2010, early July 2011, and late Oct 2011.


Looking at the long activity, it had been relatively paired off (i.e. longs bought approximately equal to longs sold), prior to a small increase very recently. This illustrates that most of the buying has come from shorts covered rather than longs bought

Mystery solved.

And visually:



and the last three times short activity was this extreme...


as Consumer Discretionary shorts were crushed... (but now are at the most extreme net long fo all sectors - suggesting the fun is over)...


which has driven up net leverage to near post crisis record levels...


Charts: Morgan Stanley and Bloomberg

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Thu, 05/16/2013 - 13:39 | 3569892 CClarity
CClarity's picture

Are investors legging out of hedges?  Unwinding the short side first, ala the 'ol arbitrage days?  

This could create an even faster uplift to market, but also makes for fragility of underpinnings, potentially making for a very fast deep downdraft.  Like the four previous situations you described.

Thu, 05/16/2013 - 13:40 | 3569897 King_of_simpletons
King_of_simpletons's picture

Great News !!

Thu, 05/16/2013 - 13:44 | 3569908 Cult_of_Reason
Cult_of_Reason's picture

OK, shorts were buying the dips, but who was selling to the shorts?

Thu, 05/16/2013 - 13:44 | 3569923 Ruffcut
Ruffcut's picture

Dick Fuld finally burned his shorts?

Thu, 05/16/2013 - 13:53 | 3569948 nugjuice
nugjuice's picture

Where do they get this stuff? Who the hell is John Schlegel? The only John Schlegel I see for Morgan Stanley is some advisor out in PA.

Thu, 05/16/2013 - 14:05 | 3569997 Divided States ...
Divided States of America's picture

The moral of the story: SHORTING is hazardous to your health.

Thu, 05/16/2013 - 13:54 | 3569954 He_Who Carried ...
He_Who Carried The Sun's picture

What difference does it make?

I don't care where they are from...

Thu, 05/16/2013 - 13:39 | 3569895 JustObserving
JustObserving's picture

Same for gold - most of the fall has been by shorts selling paper gold rather than longs dumping their physical gold

Thu, 05/16/2013 - 16:41 | 3570700 max2205
max2205's picture

Pair short cover unwinds maybe but not covers.  Who is short here. 


Plus or minus 2-5% will get bets placed again.  


This shit has a mind of its own.  Nice to see goog reverse off 925 pm gap open and close at 905

Thu, 05/16/2013 - 13:41 | 3569902 Ham-bone
Ham-bone's picture

So many logical, fundamental reasons why what is should not be. 

Yet, what until it isn't.

Thu, 05/16/2013 - 13:41 | 3569905 moneybots
moneybots's picture

Do they yell TIMBER at the top?

Thu, 05/16/2013 - 14:04 | 3569922 Ham-bone
Ham-bone's picture

Yup (repeatedly along the way), and like clockwork the "urgent" algo tripping buyers show up to repair the damage and push to new highs.*

*and this from a guy that went short end of Tuesday cause I'm so smart I thought that might be the contemplating exit point...1661.50 and I'm smoked out

Thu, 05/16/2013 - 13:41 | 3569906 RSloane
RSloane's picture

At this point, dovetailing current data and trends with past trends and outcomes in the attempt to identify harbingers is fruitless. Historical realities have no relationship to what is happening w/ the S&P today because of extreme manipulation. I hope I'm wrong. Time will tell.  

Thu, 05/16/2013 - 16:51 | 3570733 MeelionDollerBogus
MeelionDollerBogus's picture

you’re wrong but forgiven. The trick is looking at data back for decades, admitting the same controllers (puppets and puppeteers) have been at it the entire time, and realizing what the big rises and drops mean in context of who those controllers are and what other news of war, recession, booms, crisis, came out at those events. Do this and you’ll realize nothing has changed.

Thu, 05/16/2013 - 13:42 | 3569913 alien-IQ
alien-IQ's picture

How many times are we supposed to believe this "short covering" bullshit? Once in a while after a market drop...ok, I can see that...but every single day? Come on guys, this is starting to sound like complete bullshit.

Is anybody here shorting this insane market? Who are these mysterious shorts that NEVER seem to run out of money despite getting monkeyhammered on a daily fucking basis? This is ridiculous.

Thu, 05/16/2013 - 13:44 | 3569919 Chappy
Chappy's picture

agreed. i was short for the first three years of this and finially caved.  the market only goes up... until it doesn't or it goes zimbabwe style.. pick your poison.

Thu, 05/16/2013 - 14:46 | 3570200 Bay of Pigs
Bay of Pigs's picture

Yeah, anyone short in equities ended up like the bond vigilantes...

At the bottom of the fucking ocean.


Thu, 05/16/2013 - 13:42 | 3569914 Chappy
Chappy's picture

Weren't those dips during the non-QE times?  I recall quite well caving and going long just before the market tanked.  85B a month foreva'

Thu, 05/16/2013 - 13:49 | 3569937 HD
HD's picture

Years from now Tylers - after you are safe enough to write books and sit down with 60 minutes for a chat -  Old SOBs like myself will be proud that we knew you when you were just tinfoil hat bloggers.

Thu, 05/16/2013 - 13:51 | 3569943 W T F II
W T F II's picture

Very Boring Nit-Picky Details Of Structural Imbalance.

Consequently, there is only one reasonable course of action...BUY WITH BOTH FISTS...!!

Thu, 05/16/2013 - 13:51 | 3569944 rosiescenario
rosiescenario's picture

Well, the obvious answer to this problem of short buying being greater than long "investment"....we need POMO 5 days a week.

Thu, 05/16/2013 - 13:53 | 3569950 HD
Thu, 05/16/2013 - 13:57 | 3569961 madbraz
madbraz's picture

you can find the symptom of something wrotten in the same NY Fed website, different page though...


$20+ billion in securities lending (collateral) every day now...but I thought things were going so well...

Thu, 05/16/2013 - 14:15 | 3570063 W T F II
W T F II's picture

and don't forget Sunday nights for futures...

Thu, 05/16/2013 - 13:53 | 3569952 Meat Hammer
Meat Hammer's picture

How does the ol' saying go?  Bulls walk up the stairs.  Bears jump out the window.

Thu, 05/16/2013 - 13:54 | 3569955 madbraz
madbraz's picture

Today it's CSCO short squeeze and it's earnings "beat". Nevermind that they didn't mention that their "sales growth" comes from acquisitions (no disclosure by CEO Chambers, world's best contrarian indicator) and why accounts receivables increased by almost $1 billion in one year, when sales grew much less.  Hmmm...

Thu, 05/16/2013 - 14:00 | 3569980 mind_imminst
mind_imminst's picture

Bullish! The FED, ECB, and BOJ will never let the "markets" fall as far as past episodes mentioned above. It is the central banker/politician put (or addiction). Krugman says PRINT AND BORROW TOO THE MOON!!!!! Essentially. Small pullbacks (like "sell in may") will be met with tsunamis of cash. 100/200 billion per month of new fiat is for pikers. Get used to saying TRILLIONS.

Thu, 05/16/2013 - 14:07 | 3570004 JJ McApe
JJ McApe's picture


but don't worry. shorts will make a fortune soon. and poor retail investors will get slaughtered. thats just how it goes

Thu, 05/16/2013 - 15:29 | 3570405 Village Smithy
Village Smithy's picture

Shorts won't make much money because as soon as the market corrects more than 5% Holder will ban it "in the best interests of the nation". 

Thu, 05/16/2013 - 15:26 | 3570389 Village Smithy
Village Smithy's picture

Apparently no knowledge of short selling financial markets is required to earn a PhD in Economics at Princeton.

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