Biggest Bear Market Rebounds in History Create Endless Pain for Shorts

(Bloomberg) — The one-year drop in US stocks that has been a disaster for bulls has been in some respects almost as bad for the other side of the trade.

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The difficulties of short positions became apparent on Tuesday, when a basket of the most hated stocks of Goldman Sachs Group Inc. rose more than 4%, burdening the bears with losses. While the S&P 500 cycled higher and lower in 2023, each day of gains surpassed the previous session of decline, resulting in an overall gain that was the best start to the year for the market since 2019.

Such a rebound, landing just after hedge funds built bearish positions in December and retail traders dumped stocks en masse, was a recipe for pain over the past 12 months. The skeptics’ conviction was tested by a bear market rally on an almost unprecedented scale. While the S&P 500 had far fewer days of gains than usual in 2022, when the index managed to recover, it did so abruptly. Rising 1.15% on average, the index’s rise in positive sessions was the largest since 1938.

“There is a FOMO element here with investors worried that they might be on the sidelines if stocks start a sustained rally,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “Everyone knows that bear market rallies are common, but some may find it hard to keep that in mind at the moment.”

Up days were as big as they were rare. The S&P 500 spent 43% of last year’s sessions in the green, nearly one year behind since 1941. In contrast, the days of falling have accumulated, corresponding to a year in which the benchmark collapsed by 19.4%. But skeptics have repeatedly had to deal with a countertrend.

While the new year’s up and down days were evenly separated, the S&P 500 has gained an average of 1.3% in three positive sessions, more than double its move when it was down. Rising by about 2%, the index’s return was the third-highest one-year in the last decade.

Read more: Stocks take the escalator down and the elevator up: Macroman

The latest recovery came just as hedge fund clients tracked by JPMorgan Chase & Co. cut their average leverage to its lowest level since 2017. in the history of general market data from JPMorgan.

Technology stocks have been ahead of the market this week, with the Nasdaq 100 advancing for three sessions in a row, the longest streak in two months.

The resurgence of tech leadership, if it continues, is likely to be bad news for those who shunned the industry after once-touted stocks fell to the ground in 2022. to a three year minimum.

According to Mark Freeman, chief investment officer of Socorro Asset Management LP, falling bond yields and a weaker dollar were at the heart of the New Year’s surge in stocks. With deteriorating earnings sentiment, bears may be looking for opportunities to strike again despite short-term problems, he said.

“Markets are still facing major hurdles, mostly around earnings, but the bears will face a tougher fight on margins,” he said. “Obviously, short covering amplifies upside moves, but then shorts are simply dumped to a higher level and downward pressure resumes.”

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