Hedge Fund Shorting Boosts Market Momentum, Predicts S&P 500 Surge
Yesterday evening, after analyzing the latest market trends, we anticipated that the short squeeze would likely persist. While many investors had been enthusiastically riding the momentum wave, hedge funds, particularly those engaged in long/short strategies, had been consistently betting against individual stocks since the historic post-October surge. Supporting our prediction, we referenced the most recent report from Goldman Sachs PB, which revealed a continuous increase in short selling of individual stocks for seven weeks straight. The report also highlighted that the selling pressure was predominantly driven by short sales, with seven out of eleven US sectors experiencing net selling.
Fast forward to this morning, Goldman desk trader John Flood acknowledged this trend in his latest note. According to the bank's PB data, there was a significant net selling of US single stocks, primarily due to short sales, marking the highest since early January. Flood emphasized that this trend of hedge funds shorting individual stocks was bolstering market momentum. He maintained an optimistic outlook, projecting the S&P 500 to reach 5500 in the second quarter, echoing our sentiments from the previous night.
However, potential challenges lie ahead. A month ago, we warned about the impact of $265 billion in capital gains tax selling, which could hinder momentum, especially with the approaching tax deadline on April 15th. Flood reiterated this concern, noting that retail investors typically sell stocks to meet tax obligations, which might introduce some volatility into the market. Nevertheless, historical trends suggest a bullish trend could emerge post-tax payments.
Retail flow analysts at VandaTrack concurred, highlighting the gravitational pull of Tax Day on retail wallets between early and mid-April. They cautioned that this seasonal weakness in retail investor activity might lead to market choppiness, particularly at the index level, in the coming weeks and at the start of the US earnings season. However, they anticipated a recovery in retail flows by early May, aligning with NVDA's 1Q24 earnings call.