Bears go extinct in Stock Market’s $ 13 Trillion Rebound

Photographer: Michael Nagle / Bloomberg

Skeptics are a dying race in American equities. It’s another illustration of how risky it has become to doubt the resilience of the market’s $ 13 trillion rise since the end of March.

Go through the short positions of hedge funds, resistance until rising prices is the lowest in 16 years. Bears pulled out as buying increased among professional investors who were forced back into stocks despite a recession, stagnant gains and the prospect of a messy presidential election.

While perhaps logically given Federal Reserve support, rampant depletes cover at least one source of support for shares – bought by speculators who sold them short. Virtually every constituency in the market has gotten more Bullish, as the S&P 500 accounted for 52% in five months. In the past 21 sessions there has been no decline of 1%, the longest stretch since January.

“The repurchase of those short shares has been a factor that has contributed to the rally we enjoyed,” said Lawrence Creatura, a portfolio manager at PRSPCTV Capital LLC. “It will certainly be a weaker force going forward, because mathematically it is just a smaller amount of deferred shares that are still short.”

The S&P 500 added 0.7% over five days, recording its fourth straight weekly gain. It went over the record high of February 19 on Tuesday to fund the fastest recovery of the bear market in history. The Russell 2000 index of smaller companies fell 1.6%, while the Dow Jones Industrial Average was relatively flat. The Nasdaq 100 performed better, climbing 3.5%.

Steamrolled by a rally whose speed has been the strongest for decades, bears give up. At the beginning of August, the median S&P 500 stock had extremely short interest rates, equal to just 1.8% of market capitalization, the lowest level since at least 2004, according to data collected by Goldman Sachs Group Inc. All major sectors except energy have seen bearish bets in bottom decile over the last 15 years.

For an example of why, take a look at Tesla Inc., the electric car maker whose shares have increased nearly 400% this year. On nearly 4.5% of the total shares available for trading, its short-term interest has fallen to a record low, down from a high of 29% a year ago, according to data from IHS Markit. Other examples where bears have been reversed are Twilio Inc., Lumber Liquidators Holdings Inc. en Peloton Interactive Inc.

“It looks like all those fund managers have been bearish over the past four years and expect a stock crash so far Bullish,” Shawn Cruz, senior market strategist at TD Ameritrade, said in an interview. “Sentiment has turned positive about equities in general, but sentiment is also turning positive for a return to growth.”

The tide is getting harder to fight with retail investors flocking to useless companies like Nikola Corp. and Modern Inc. More money managers are forced to embrace the rally, by ignoring this year’s profit contract and banks over fiscal and monetary stimulus. At 26 times expected profits, the S&P 500 traded at the highest multiple since the dot-com era.

Of course, stocks that rally are bad for bears – and that often shoots them off the market at times that may be ripe for skepticism. Think of the internet frenzy 20 years ago. Back then, big speculators, mostly hedge funds, were not only short on S&P 500 futures in all but five weeks in 1998 and 1999. Those most losing bets were fully unpacked in 2000. That was when the crash came.

The impact of short coverage is particularly pronounced this time around. A Goldman Sachs basket of the most hated hats has nearly doubled since the bottom of the market in March, a gain nearly twice as large as the S&P 500s.