Wednesday, November 25, 2020

Shorts Getting Squeezed

If the performance of Refinitiv's U.S. Most Shorted Stocks Index is any indication, the shorts have been caught off guard since the market has accelerated higher over the last two months. Most of the move began subsequent to the U.S. election. As the below chart shows the Most Shorted Index is up over 30% while the S&P 500 Index is up 7.9%. Investors likely are not surprised by some of the performance contributors over the last month like, Nordstrom (JWN) up 91%, Plug Power (PLUG) up 74%, Macy's (M) up 52%, Carnival (CCL) up 34%, just to name a few of the companies in the Short Index.

The move higher in these most shorted stocks coincides with investors rotating into underperforming sectors and asset classes. The above chart shows small cap stocks, as represented by the Russell 2000 Index, up 22.4% since the end of August. Midcap and international stock performance has overtaken U.S. large cap in the near term as well.

The move higher in these underperforming market segments is also showing up on a sector basis. The below chart shows the performance of the S&P 500 Index sectors since the end of September. The energy sector is far outpacing all the other S&P 500 sectors. Still though, the energy sector is down nearly 35% on a year to date basis. The next best performing sector is financials and this sector remains down 7.2% year to date.

The broadening of the market's performance into these underperforming sectors and asset classes is a positive for potentially sustaining the move higher in stocks. The S&P 500 Index's 62% recovery since the March low has been nothing short of astounding and the double digit return so far in November would suggest some consolidation of these recent gains should not be unexpected.

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