In a world in which the bipolar, schizophrenic markets are dominated by Mrs. Watanabe's daily gyrations of the USDJPY (in response to Kuroda's daily jawboning) which in turn has become the primary signal feeding ES algos now that fundamentals are no longer relevant and that the EURUSD-ES correlation is dead and burried, there continues to be one, almost assured way to generate alpha for those so inclined to gamble with the fastest of the vacuum tubes out there: going long the most shorted stocks, which have become the most convex way of betting that Ben Bernanke will continue to dominate the hedge fund league tables as the world's most accomplished portfolio and risk manager.
Indeed, using our previous representations (Q3 2012 [5], Q4 2012 [6]) of the most shorted stocks to generate a "long basket" and sitting it out, has generated some 40%+ annualized returns without fail. Which is why it is now time to look at the most recent roster of stocks most hated by the hedge fund community, which slowly but surely is converting into the much maligned "long onlies" as abandoning hedges is the only way to at least catch up with the market, if not overtake it.
This time, however, instead of looking at the most shorted overall names, we focus on two universes: those companies under $1 billion in market cap most shorted by hedge funds only (i.e., those who have to cover to minimize the Fear Of Missing Out [7]), as well as the larger, $1+ billion market cap companies.
Under $1 billion:
[8]
Over $1 billion:
[9]
Let the short squeeze begin.
Source: Goldman