The S&P 500 Index has started each day this week down significantly on fears of trade wars and slowing economic growth only to recover and close well into the green. While the movements of the stock market aren’t always clear, there is a culprit lurking beneath these moves: short-covering.
Goldman Sachs Group Inc.’s basket of the most-shorted stocks is up 3.2% on Wednesday, beating the S&P 500’s 0.5% gain. The implication is some investors are covering their short bets ahead of President Donald Trump’s tariff announcement 4 p.m. in Washington.
“Many traders are leaning into short covering heading into this evening ahead of reciprocal tariffs deadline, and that will ignite short squeezes,” said Dennis Dick, head of markets structure and a proprietary trader at Triple D Trading. “We have to be cautious and can’t chase this market.”
The move has been particularly striking on Wednesday. After declining more than 1% at the open, the index reversed the loss to trade up 1% by early afternoon. Since the aftermath of the stock market’s bear-market plunge in October 2022, there was just one other day when the gauge posted a turnaround of a similar magnitude, data compiled by Bloomberg show.
Bearishness has grown this year with US equities down in five of the last six weeks. Large speculators have boosted their net short S&P 500 positions to the highest since late January, just weeks before the index peaked. But when investors cover their short bets because the market is rising, as it is this week, it can further juice the rally.
Still, bets against the world’s largest exchange-traded fund — the SPDR S&P 500 ETF Trust (SPY) — have climbed over the last three sessions, suggesting investors don’t expect the recent rebound to hold. It makes sense, considering they still have fresh memories of last month’s equity rout where the S&P 500 briefly sank over 10%.
“This move doesn’t make me comfortable,” said Thomas Thornton, founder of Hedge Fund Telemetry, who is net short the market with about 15% in cash. “I don’t think a bottom is in. The market is seeing meme-like trading — buy regardless of risks.”
Written by: Jess Menton @Bloomberg
The post “Short-Covering Is Lying Beneath the Recent Stock Market Rebounds” first appeared on Bloomberg