For the last two years, short interest in the US stock market's largest ETF has collapsed as bears have been squeezed back to their lowest level of negativity since Q2 2007 (the prior peak in the S&P). But, there's a bigger issue - despite record highs and 'no brainer' dip-buying, anxious longs have dumped S&P ETF holdings for four straight months - the longest streak since 2009 - seemingly confirming Canaccord's recent finding that "it's not complacency, it's paralysis."
Bearish investors say they are scaling back on these bets not because their view of the market has fundamentally changed, but because it is difficult to stick to a money-losing strategy when it seems stocks can only go up.
“There seems to be an overall view that people are invincible, that things will always go up, that there are no risks and no matter what goes on, no matter what foolishness is in play, people don’t care,” said Marc Cohodes, whose hedge fund focused on shorting stocks closed in 2008.
The absolute number of SPY shares short has not been this low since Q2 2007.
The Wall Street Journal points out that 'times are tough for skeptics of the bull market'. Flummoxed by the endurance of a 2017 rally that produced its 27th S&P 500 record this week, investors are backing off bets that major indexes are headed downward. Bets against the SPDR S&P 500 exchange-traded fund, the largest ETF tracking the broad index, fell to $38.9 billion last week, the lowest level of short interest since May 2013, and remained near those levels this week, according to financial-analytics firm S3 Partners.
“The shorts have been frustrated now for quite a while,” said Scott Minerd, global chief investment officer at Guggenheim Partners, which has $260 billion in assets under management.
And as we detailed earlier in the week, in one sign of capitulation among the bears, stock pullbacks have been getting shorter. This year's 2.8% maximum drawdown (for now), continues a 6 year streak of drawdowns that are dramatically below the longer-term average of 14.1% drops intra-year.
The Journal notes that, if it finishes 2017 that way, it would be the second-smallest decline in a calendar year over the past 60 years, according to LPL Financial, an independent brokerage and investment firm.
So shorts have covered drastically... What about the longs?
As Bloomberg reports, even as the S&P 500 Index clawed its way to a fresh record and squeezed out a third consecutive weekly gain, signs of fading enthusiasm in U.S. stocks have become increasingly difficult to ignore. The latest can be seen in the SPDR S&P 500 Trust, the biggest exchange-traded fund tracking the U.S. equity benchmark. As of now, investors have pulled over half a billion dollars out of the ETF in July. That puts the fund on pace for a fourth consecutive monthly outflow, which would be the longest streak since the start of the bull rally in 2009.
So shorts are out, longs are fleeing.. so who is buying?
Simple - recall that as we showed earlier in the week, using a Credit Suisse chart, there has been just one buyer of stocks since the financial crisis: corporations themselves.
As we have shown in the past, and as Canaccord points out again, these relentless credit flows have fueled stock buybacks, "which have been the driving force for higher stock prices."
And yet, despite those record buybacks, stock market volume has been anemic. Since the winter of 2016 panic, the 200-day moving average of NYSE volume, shown in yellow in the next chart, has been in steady decline. This mirrors what was seen in the years following the “London Whale” panic. To Reynolds, this lack of volume is more reflective of paralysis than complacency among equity investors.
Ane even hedge funds have given up trading...
Canaccord's Reynolds tied it all together last week:
Those opposing forces have led to a compression of volatility. When stocks have rallied strongly, they have then been met with investor selling. When stocks sell off, the buybacks have picked up after the selling runs its course. That has been the case for more than eight years. Those forces have led to an equity bull market that moves higher in fits and starts, with some brief pullbacks from time to time. Given the positioning of equity investors and continued flows into credit, we do not see that pattern changing for some time."
If Reynolds is right, and he may well be, there is just one catalyst that can break this chain of events: a forceful Fed intervention which will make it all too clear that what has worked until now, no longer will. To be sure, the Fed has made several very pointed statements in that regard in recent weeks, however as has been the case for the past 8 years, it still has to actually do something to prevent what increasingly more banks are openly calling an asset bubble and in some cases, even begging the Fed to intervene.