Five years after the credit crisis, equity markets are showing zero tolerance for bears.
The Standard & Poor’s 500 Index (SPX)’s 5.8 percent drop between Jan. 15 and Feb. 3 prompted hedge funds to push short sales to the highest level since 2012 and spurred the fastest withdrawals from exchange-traded funds in more than a year. Both moves backfired amid a three-week rally that restored $1.5 trillion to American share prices.
While stocks remain subject to shocks, it’s taking less time for them to dissipate as investors acclimate to Federal Reserve Chair Janet Yellen’s plan for removing economic stimulus. The S&P 500 is within 0.2 percent from a record and poised to erase its loss six weeks faster than the average recovery from declines of 5 percent or more since the bull market began in 2009, according to data compiled by Bloomberg.
“It’s very hard to be a bear on U.S. equities,” Michael Purves, chief global strategist at Weeden & Co. in Greenwich, Connecticut, said via phone. His year-end target for the S&P 500 is 2,100, the highest among 21 strategists surveyed by Bloomberg. “U.S. equities are the most logical place to go. I’m a bull on equity prices but it’s going to be a rockier ride in 2014 than it was in 2013.”
After sliding in six of the eight days ending Feb. 3 on concern turmoil in emerging markets would curb global growth, the S&P 500 has rebounded 5.9 percent, including a four-day gain ending Feb. 11 that was the biggest advance in more than a year. That surge concluded with a 1.1 percent rally as Yellen pledged to maintain Ben S. Bernanke’s policy of cutting bond purchases in measured steps. Economic growth has strengthened and there is “broad improvement” in the labor market, she said.
The S&P 500 added 0.1 percent to 1,845.99 at 10:08 a.m. in New York today.
The day of Yellen’s testimony also marked the first time hedge funds and other large speculators using S&P 500 Index futures pushed bearish bets above bullish ones since September 2012, according to data compiled by Bloomberg and the U.S. Commodity Futures Trading Commission. Investors have been net-short in the two weeks ended Feb. 18, a period when the gauge rose from 1,755 to 1,841.
Not only are bears getting the direction wrong, they’re betting against the wrong companies. Stocks with the most bearish bets have climbed twice as fast as the rest of the market during the rebound, gaining 12 percent since Feb. 3, according to data compiled by Goldman Sachs Group Inc. and Bloomberg.
Athenahealth Inc. (ATHN), a seller of Internet services to drugstores with 24 percent of its shares sold short, according to exchange data compiled by Bloomberg, has surged 44 percent. The Watertown, Massachusetts-based company rallied after reporting fourth-quarter profit and sales that beat analysts’ estimates.
Tesla Motors Inc., with short bets making up 37 percent of shares, has risen 40 percent since Feb. 3. The stock rallied 14 percent yesterday after the electric-vehicle maker’s Model S became the first U.S. car named best overall pick by Consumer Reports. Palo Alto, California-based Tesla’s market value exceeded $30 billion after Morgan Stanley more than doubled its projected price for the stock to $320.
“If I were bearish, I’d be very concerned,” Doug Foreman, chief investment officer at Kayne Anderson Rudnick Investment Management in Los Angeles, said by phone. His firm oversees about $9 billion. “What’s it going to take for me to be right? I don’t know. There is no evidence that they’re going to be right any time soon.”
The latest selloff was the 19th time the S&P 500 has fallen at least 5 percent since the bull market began, according to data compiled by Bloomberg and Bespoke Investment Group. The market on average needed nine weeks to retrace those moves, with the shortest coming in 2009, according to the data. The slowest rebound ended in February 2012, when the benchmark needed eight months to recoup a 7.2 percent loss.
Uri Landesman, the president of New York-based hedge fund Platinum Partners, said on Feb. 7 that “stocks have a lot of room to go down” after a five-year rally. The rebound doesn’t mean risks have subsided, he said in an interview yesterday.
“I’ve been a non-believer for so long that I just am not believing yet,” said Landesman, who helps oversee about $1.3 billion. “We’re going to see a very volatile year, with the potential of low 1,500s to the downside.”
For speculators, the cycle of embracing bearish bets only to watch the shares gain is nothing new. The HFRX Equity Hedge Index rose 4.8 percent in 2012 and 11 percent in 2013, years when the S&P 500 advanced 13 percent and 30 percent. The lightly regulated investment pools trailed as short sales, in which a security is borrowed and sold in the hope of a decline, hovered around half their holdings, data from International Strategy & Investment Group Inc. show.
Skeptics will be vindicated because auto sales, retail spending and industrial production are all trailing analyst forecasts, according to Douglas Kass, the founder of Palm Beach, Florida-based Seabreeze Partners Management Inc. Valuations above historical averages, reductions in the Fed’s bond buying program and emerging markets all pose risks, Kass, who is short the S&P 500 with a 1,650 price target, said in a Feb. 25 phone interview.
“The rose-colored glasses being worn by investors might be cleared in the year ahead as the withdrawal from QE and low rates might be harsher than many expect,” Kass said. The Fed’s stimulus, known as quantitative easing, “doesn’t create a safe world, it creates a temporary high and the danger always comes on the flip side,” he said.
U.S. stocks slipped yesterday after the S&P 500 briefly rose above its closing record for a second consecutive day. The index has increased 173 percent since falling to a 12-year low in March 2009, restoring about $14 trillion to share values. It’s four points away from erasing losses sparked by turmoil in emerging markets that spurred speculation the global economic recovery would slow.
Through January and February, investors pulled more than $11 billion from mutual funds and ETFs that hold American shares, the most for any two-month period since December 2012, according to data compiled by Bloomberg and the Investment Company Institute. Last year, investors added $139 billion to ETFs focused on U.S. equities, with positive flows into the funds during all but one month.
Money is beginning to return to ETFs with the S&P 500 approaching a fresh record. Almost $4 billion was added to U.S. equity ETFs yesterday and $5.3 billion has flowed in over the past five days, according to data compiled by Bloomberg.
After predicting the sell-off that began in January had the potential to snowball into a full-blown crash, Tom DeMark, the founder of DeMark Analytics LLC, is sounding the all-clear.
DeMark said in a Feb. 5 interview on CNBC that the U.S. stock market had reached an “inflection point” and the S&P 500 could fall to 1,100 if certain conditions over the next few days were met. The price patterns he was watching for didn’t emerge, and by Feb. 6 DeMark knew the market wouldn’t plunge, he said in a Feb. 24 phone interview.
The S&P 500 will probably rise to about 1,885 within the next three weeks after about six successively higher closes, DeMark said. That implies a gain of more than 2 percent.
“It was just something novel to look at,” DeMark said of his earlier statement about the possibility of a crash. “The short-term requirements in early February had to exist, and they didn’t exist, and they expired.”
Not everyone was taken by surprise by the rebound. As stocks began to recover the first week of the month, traders made unprecedented use of the options market to bet the advance would gain traction. Those paid off when the benchmark gauge for American stocks had its biggest two-day rally since October on Feb. 6 and 7.
Ownership of puts on the Chicago Board Options Exchange Volatility Index reached a record 3.2 million on Feb. 6, according to data compiled by Bloomberg. Money poured into the bets against the VIX after the gauge, used by investors as insurance against share losses because it rises when equities fall, climbed to a 13-month high of 21.44. It then collapsed to 13.57 by Feb. 14.
“What we’re seeing is a resilient economy and I’m afraid there’s been a reluctance on some people’s part to focus on the bigger picture,” Howard Ward, the chief investment officer for growth equity at Rye, New York-based Gamco Investors Inc., which oversees about $47 billion, said in a Feb. 25 phone interview. “There’s a lot of good news out there that has not been received.”
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