Stock Market Short Sellers That Helped Fuel This Year’s Rally Are Finally Giving Up

(Bloomberg) — A worrisome thought for the stock faithful: You won’t have the bears to kick around anymore.

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Fresh off the strongest first half for the S&P 500 in five years, the rooting out of unbelievers has shown signs of picking up speed. A source of anxious buying when the tide turned upward, short sellers who came into 2023 preparing to feast have been backing away from positions as stocks rally.

Shifting sentiment can be seen in data showing bearish positions in exchange-traded funds slipped to three-year lows while shorts in S&P 500 futures were unwound at the fastest pace since 2020. Meanwhile, the population of optimists is exploding, with bullish newsletter writers in Investors Intelligence survey outstripping bearish ones by 3-to-1, the highest level since late 2022.

It’s an axiom of investing that one of the best setups a long-oriented trader can hope for is one where everybody else is braced for disaster. That was the situation as doubts about the economy surfaced in 2022, and helps explain how well bulls have done since markets bottomed nine months ago.

Now, the strength of the rebound is putting pressure on bears, leaving the market with one fewer accelerant as concern about the Federal Reserve’s war on inflation reasserts itself at a time when corporate earnings are forecast to drop for a third straight quarter.

“Sentiment is not extreme but it is stretched, and recent surveys suggest it won’t provide the same tailwind to stocks going forward,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “As we look to the second half, we expect the market to be put to the test as investors demand results to justify recent performance.”

Story continues

Stocks fell in the holiday-shortened week as solid data on the labor market and services activity rekindled concern the Fed will keep raising rates to tame inflation. Treasury yields hit fresh highs. All major equity benchmarks were in the red with the S&P 500 sliding 1.2%.

Short sellers likely lost $37 billion in June, according to an…


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