In the fall of 2012 [9], realizing very well and reporting accordingly that nothing is fixed in the fourth year of the centrally-planned New Normal, that the economy is as bad as ever and by implication that the Fed would soon unleash another round of QE to "boost the contracting economy" (as it did when it revealed QE3 which it would not have done had the economy been improving as so many "experts" lied, and still lie), we made a simple proposition: in a New Normal world in which the Fed is the Chief Risk Officer of the "market", and in which nothing is ever allowed to go down, the best "alpha-generating" strategy is to go against the grain of those whose job is to hedge against possible downturns, and being long the most hated, a/k/a most shorted courtesy of hedge fund groputhink, companies.
Following up on the initial report last September, we found that the "most shorted stocks" had soared relative to the S&P 500, and while an outright basket long consisting of the most-shorted names would have outperformed the market massively, even a pair trade in which one was long the most shorted names and short the S&P 500 would have outperformed 99% of all hedge funds.
[10]
Fast forward to today when absolutely nothing has changed since 2012, and while the Fed may be tapering (if only for a little big longer before it is forced to untaper), the BOJ was added to the easing fray and the ECB itself is about to confirm that the European economy has re-entered a triple dip recession. Remember: central banks do not get involved with unconventional policy if everything is fine and the economy is recovering.
To be sure, the recent hiccup in the high beta "story" names means that the record outperformance of the most shorted names over the S&P was impacted in recent months...
[11]
... however, since the fundamental (or quite the opposite) monetary picture remains the same (and any market crash will be greeted with another monster money printing fest by the Fed) there is no reason to assume that the most idiotic, and thus profitable (yes, bizarro world and so on) "alpha" strategy of the past 5 years will stop working any time soon.
Anyway, below, for the third year running, we present the 50 most shorted (and most convex) Russell 2000 names, which are sufficiently small and illiquid, that even the tiniest rumor or upgrade by a contrarian research shop is able to send into a short covering frenzy. They are sorted by short interest as a % of the float in declining order, which means that the absolutely most hated stocks are at the top.
[12]
It goes without saying that in a normal economy, without crony capitalist (bordering on fascism) central planning, without socialist interventions to keep the most insolvent afloat, and without another credit and equity bubble allowing these cash burners to boost their capital at any given moment on covenant-lite terms, they would all be bankrupt years ago.
As it stands right now, they are some the best performing stocks around.
Thanks uncle Ben and aunt Janet.