Recent data from Goldman Sachs Inc. reveals that short selling of US-listed individual stocks has reached its peak in the past six months. The technology, telecommunications, and media sectors are experiencing the bulk of this bearish betting.
Following a robust 9% increase in the S&P 500 during the first quarter, which saw a record number of highs since 2017, there's been a noticeable uptick in short positions. This trend suggests that certain hedge funds, employing long-short equity strategies, are beginning to counter the recent market rally.
According to Goldman Sachs, tech, media, and telecom (TMT) stocks are now less dominant in the overall US stock exposure, dropping to 29.1% from a mid-February peak of 32.5%. This shift comes as the economy shows resilience and Federal Reserve officials hint at a less accommodative stance, potentially keeping interest rates elevated for an extended period. Such an environment could significantly impact the valuations within the technology sector.
The report further highlights a spike in net selling across prime brokerage books, marking the highest level in five weeks amid a surge in gross trading activities for the twelfth consecutive week. The increase was largely driven by short sales in individual stocks, outstripping long purchases in macro products by a factor of 1.6 to 1.
Despite the S&P 500 experiencing a minimal drawdown of just 1.7% this year, the lowest on record, the rise in short-selling activity could exert additional downward pressure on the market.
Moreover, it's noted that trend-following strategies, also known as CTAs, have amassed a significant long position in global equities, reaching a historical peak. In the event of a market downturn over the coming month, these funds might be compelled to offload up to $141 billion in stocks.
