Short sales on the New York Stock Exchange have climbed above last September’s peak, a level that preceded a five-month rally and heralded losses for bears.
Shares borrowed and sold reached 5.35 percent of stock available for trading last month, according to data compiled by NYSE Euronext. That eclipses 5.28 percent on Sept. 15, when bearish bets peaked last year and the 25 most-shorted companies in the Standard & Poor’s 500 Index began a 21 percent advance, data compiled by Bloomberg show.
Investors speculating on declines have pushed up short sales each of the last two years only to see the trades fizzle as actions by central banks helped stoke rallies. Bulls say the same thing will happen in 2012 as European leaders work to contain the debt crisis and companies beat earnings projections for a 14th straight quarter. For bears, slowing economies from China to Germany mean the bets will finally pay off.
“To the extent people have gone short U.S. domestic equities, I think they’re kind of wasting their time,” Michael Shaoul, chairman of Marketfield Asset Management in New York, which oversees more than $2 billion, said July 11. “As I said last year when Europe was falling apart and the U.S. was going down, once this panic is over we’ll go straight back up again.”
Stocks fell four straight days last week, before JPMorgan Chase & Co.’s quarterly earnings report boosted the S&P 500 on July 13, giving the index a gain of 0.2 percent for the week. Earlier losses came as companies from Applied Materials Inc. to Cummins Inc. cut sales forecasts.
Almost $1 trillion has been erased from U.S. equities since shares peaked this year on April 2, data compiled by Bloomberg show. The S&P 500 declined 0.4 percent to 1,351.12 at 9:47 a.m. New York time today.
Concern that recessions in Europe and slowing growth in China will kill the global recovery helped pushed bearish bets to levels seen in 2011 and 2010. Short sales crested in September as the S&P 500 approached 1,099.23, its lowest level of 2011. The index surged 29 percent in the next six months.
“A pattern that appears to be unfolding again is a third year of weakness during the summer,” Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4.5 billion in Raleigh, North Carolina, said July 11. “But as in the past years, the U.S. market remains attractive. I still believe it possesses bullish fundamentals: earnings and valuations and potential for growth versus the other markets.”
Investors making bearish bets in September suffered as stocks such as PulteGroup Inc. and Whirlpool Corp. with the highest short interest rallied 21 percent on average through April 2, 2012, according to data compiled by Bloomberg. The advance is about 3.4 percentage points more than the S&P 500’s climb.
Gains in the most-hated stocks have hurt returns for professional money managers. Hedge funds with a short bias have lost 8.3 percent in 2012, the most of the 19 strategies tracked by Hedge Fund Research Inc. in Chicago.
Applied Materials and Cummins were among the 100 stocks in the S&P 500 with the fewest short sales. Bearish investors missed out as the stocks tumbled 10 percent and 9.4 percent, respectively, since September.
Cummins, based in Columbus, Indiana, cited weaker demand and a slower economy when it cut its revenue forecast last week. The maker of truck engines plunged the most in almost a year July 10, after saying it saw “demand in some markets weaken recently as growth in the global economy has slowed.”
Applied Materials, the chipmaking-equipment provider based in Santa Clara, California, cut its fiscal 2012 sales and profit forecasts last week amid weakness in Europe and China. Advanced Micro Devices Inc., the second-biggest maker of processors for personal computers, said second-quarter sales fell for the same reasons.
“Both China and Europe are quite weak,” Mike Splinter, chief executive officer at Applied Materials, said last week in San Francisco. “Both markets are worse than they were at this time last year.”
China’s gross domestic product expanded 7.6 percent last quarter from a year earlier, the slowest pace in three years. In Germany, the largest economy in Europe, business confidence has slumped to the lowest level in more than two years last month and retail sales unexpectedly decreased in May.
In the U.S., the unemployment rate has remained above 8 percent since 2009 and fewer jobs than estimated were added in the past four months, according to Labor Department figures. The world’s largest economy is expanding at its slowest post-recession rate in six decades, according to data compiled by Bloomberg.
Investors betting on losses since the S&P 500 reached a four-year high on April 2 have been rewarded. The 25 most-shorted stocks have fallen 12 percent in the past three and a half months, almost triple the S&P 500’s loss, according to the median return compiled by Bloomberg.
“Bearishness spiking over the last month or so is really a function of the global slowdown and the global fear that China continues to see downward adjustments to their GDP,” said Chris Baggini, a fund manager at Berwyn, Pennsylvania-based Turner Investment Partners Inc., which oversees about $18 billion.
Short sales are climbing while another measure of investor concern holds below its historical average. The Chicago Board Options Exchange Volatility Index, derived from prices to protect against losses in S&P 500 shares, has declined 28 percent this year to 16.74 and hasn’t exceeded 20 since June 25.
Four out of the six S&P 500 companies that reported results last week beat analysts’ earnings estimates while one missed, data compiled by Bloomberg show. Overall, profits probably decreased 2.1 percent in the second quarter, the first drop in almost three years, according to a Bloomberg survey of analysts.
The U.S. economy is forecast to expand 2.1 percent in 2012 after growing 1.7 percent in 2011, according to the median of 72 economists surveyed by Bloomberg. Reports last week showed the U.S. trade deficit narrowed for a second straight month in May.
PulteGroup was the 12th most-shorted S&P 500 stock in September as reports on new home starts and sales signaled weakness in the U.S. housing market. The largest U.S. homebuilder by revenue, based in Bloomfield Hills, Michigan, has more than doubled since then as its first-quarter loss narrowed and it reduced costs and sold houses at higher prices.
“It was the first quarter in several years that fundamental demand came in stronger than expected, allowing us to beat our forecast for the period,” Chief Executive Officer Richard Dugas said on a call with analysts in April.
Whirlpool gained more than twice the S&P 500 from September to the April 2, 2012, high. Almost 12 percent of shares available were sold short in September, making it one of the 25 stocks with the most bearish bets in the S&P 500.
The world’s largest appliance maker beat the average analyst projection for profit in the fourth quarter and the first three months of 2012. On Feb. 1, the Benton Harbor, Michigan-based company projected full-year earnings that exceeded analysts’ estimates.
The ratio of bullish positions to short positions fell to 11.3 this month, down 12 percent from the 12-month high in April, according to Markit, a London-based research firm.
Higher profits have kept the S&P 500 trading at a discount to its historic mean. The average price-earnings ratio this year was 13.8, 16 percent below the average since 1954 according to data compiled by Bloomberg.
“The healthiest spot of the economy is ironically the corporate sector,” Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., said in a Bloomberg Television interview last week. His firm oversees $3.68 trillion. “Equities are reasonably priced, arguably cheap compared to bonds.”