Bears surrendering again with markets rally defying all bad news

Potential dip buyers were seeing plenty of bleak headlines as US stocks sold off last week. Growth was slowing. Another wave of virus infections was raging. The US Federal Reserve mulled tapering monetary stimulus. And few stocks were supporting the market.

With fears growing that the worst was yet to come, hedge funds stepped up selling. During the first four days of last week, they dumped stocks at the fastest pace in four months, with short sales outpacing long buys by a ratio of 10-to-1, client data compiled by Goldman Sachs Group’s prime broker show. Similar data at Morgan Stanley pointed to a pivot to exit as well.

Yet as has been the case all year, that doubt proved misplaced. The S&P 500 Index fully recovered in days, notching record highs along the way. American stocks have joined a global rally as China’s central bank chief vowed to stabilise the supply of credit and boost the amount of money supporting smaller businesses and the real economy.

It’s the latest evidence of a resilient market that has defied all the worries from sky-high valuations to an economic slowdown. As bears give up, their moves add fuel to the rally that’s already the fastest in nine decades.

A Goldman Sachs basket of most-shorted stocks is up almost 40 per cent this year, double the gain for the S&P 500. And on Monday, Russell 3000 stocks performed in perfect inverse relationship to their short interest. That is, the higher a stock’s short interest, the better the return.

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“I’m 100 per cent surprised by the market momentum,” said Chad Morganlander, senior money manager at Washington Crossing Advisors. “Some of it is based off earnings, but most of it is based off monetary policy not only here in the United States but across the globe,” he added. “It’s impossible to be a sceptic when you have liquidity so ample.”

Count Wells Fargo’s Chris Harvey was the latest bear who gave up. The equity strategist boosted his year-end target for the S&P 500 to 4,825 from 3,850 previously, citing an earnings rebound that’s faster than expected. A strong market usually begets higher prices, he notes, pointing to a historic pattern where the index tended to keep rising for the rest of the year after posting a gain of at least 10 per cent in the first eight months.

The S&P 500 has jumped 20 per cent this year, having gone almost 10 months without a 5 per cent drawdown. While the rally has driven short sellers almost into extinction, scepticism lingers. Strategists at Bank of America and Stifel Nicolaus, for instance, still expect the index to end the year at 3,800 – a 15 per cent drop.