The autumn bull was about chasing Dow stuff while NASDAQ did nothing. The 2023 bull is all about chasing those old laggards, while the Dow is doing nothing. This creates more and more P/L pain as big capital isn’t capturing these shifts quickly enough…
Let these statistics sink in. YTD performance:
MEME +40%, most shorted +32%, NASDAQ +16%, SPX +8%. Pain is huge as people must buy back low quality shorts.
SPX moving sharply higher…as well as VIX. Somebody big is looking for hedges. For more, read our latest logic on volatility here.
Covering large cap shorts that have moved sharply higher has been very painful. GS writes: “This month’s notional short covering in Single Stocks is the largest since Jan ’21 and ranks in the 98th percentile vs. the past 5 years, driven mainly by covering in large cap names.” Note that macro has been sold though.
GS prime book writes: “Fundamental L/S alpha finished at -0.3%, driven entirely by short side losses that outweighed long side gains. Fundamental L/S short side alpha ended January at -1.3%, the 5th worst monthly performance on our record (since 2016).”
Pundits were busy talking about the elevated put call ratio late last year, but few understand those levels were just an effect of “interest rate arb” (deep in the money puts…more here). Things have changed a lot since then. The put call ratio is back to falling sharply, just as the market is making new year highs…and the ratio is not “distorted” anymore.
Gross leverage for all hedge funds up a whopping 13% in January to 240% which is a 12-month high. Time to get nervous? Not so much. Net leverage still “only” at 39%-tile (1 year look-back) and long/short ratio a single digit percentile.
NASDAQ hasn’t been this overbought since November 2021. SPX is getting up there as well. Let’s see how this closes, but imagine the pain should SPX close in red after the initial melt up?
Getting extended up here…but overbought can stay “over” for longer than most can “afford”.
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