Investors fret over durability of summer rally in US markets


Investors are elevating purple flags over a stock market rally that has added greater than $7tn in worth to US equities since June, with many of the positive factors being pushed by hedge funds unwinding bearish bets relatively than newfound conviction that it’s time to purchase.

Traders at Goldman Sachs, Morgan Stanley and JPMorgan Chase have warned purchasers in latest days that the bounce in shares isn’t underpinned by confidence the surge can final, in accordance with interviews with merchants and personal brokerage studies seen by the Financial Times.

Instead, the rally — together with the frenzied growth and bust in meme shares that recollects final 12 months’s market ructions — has been fuelled by hedge funds overlaying brief bets structured to revenue from the market decline earlier this 12 months, they mentioned.

Morgan Stanley and JPMorgan have discovered that purchasers have even been promoting out of long-term wagers, suggesting they’ve little religion the rally can final. Some are already betting that the restoration will peter out, with Goldman’s hedge fund purchasers reloading their bearish bets.

“The rhetoric has shifted to be less bearish, but the flows we’ve seen have been all short covering,” mentioned a banker at one of the biggest prime brokers. “If they really believed in the rally, they would be buying longs and we don’t see that.”

Justin Cummings, a portfolio supervisor at household workplace Savoy Capital, mentioned: “There is no real follow-up from long only or fundamental buyers, who are largely on the sidelines.”

In latest days, buyers have been captivated by an uptick in choices buying and selling volumes in addition to a rally in the shares of firms hardest hit in the sell-off this 12 months, together with many of the shares that had been closely shorted by hedge funds.

In an indication of the tenuous image, markets lurched decrease on Friday in a risky buying and selling session, with the Nasdaq Composite closing down 2.6 per cent for the week, ending a four-week stretch of positive factors. The S&P 500 fell 1.2 per cent, taking its losses for the 12 months to date again above 11 per cent.

Dealers on Wall Street warned that gyrations in the market may but enhance, notably as an enormous chunk of choices expire on Friday.

Nowhere has the market tumult been extra conspicuous than in the shares of troubled retailer Bed Bath & Beyond, a meme stock favorite that’s as soon as once more lighting up message boards on Reddit.

Trading volumes in the stock multiplied this month in uncommon vogue, and on Wednesday it briefly skyrocketed to $30 a share — a greater than doubling for the 12 months. Since then a quantity of buyers have cashed out, together with college pupil Jake Freeman, who made $110mn buying and selling the stock.

Freeman’s disclosure of a stake in pharmaceutical firm Mind Medicine was sufficient to entice others buyers into the small-cap stock, briefly driving its shares up 78 per cent on Thursday in the type of speculative fervour that characterised the meme stock-driven market growth in early 2021.

Such frenetic exercise gives little assurance to buyers searching for indicators that the bear market rally in the S&P 500 and Nasdaq Composite may be sustained, notably as policymakers on the Federal Reserve increase rates of interest to gradual the US economic system.

Money managers have been hoping all 12 months for an all-clear sign that they’ll dive again into the US stock market however as a substitute have been met with a muddied image from US policymakers trying to curb stubbornly excessive inflation.

“We are not out of the woods at all yet,” mentioned Charlie McElligott, a strategist at Nomura.

Additional reporting by Patrick Temple-West

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