Investors are raising red flags about a stock market rally that has added more than $7 billion in value to U.S. stocks since June, with many of the gains driven by hedge funds unwinding bearish bets rather than the new conviction that it is time to buy.
Traders at Goldman Sachs, Morgan Stanley and JPMorgan Chase have warned clients in recent days that the rally in stocks is not based on confidence that the rally can last, according to trader interviews and private brokerage reports seen by the Financial Times.
Instead, the rally, including the frenzied boom and bust in meme stocks reminiscent of last year’s market routs, has been fueled by hedge funds hedging short bets structured to profit from the market downturn earlier this year, they said.
Morgan Stanley and JPMorgan have found that clients have even sold short of long-term bets, suggesting they have little faith that the rally can last. Some are already betting that the recovery will fizzle out, with Goldman’s hedge fund clients reloading their short bets.
“The rhetoric has changed to be less bearish, but the flows we’ve seen have been short-lived,” said a banker at one major brokerage. “If they really believed in the rally, they would be buying longs and we don’t see that.”
Justin Cummings, portfolio manager at family office Savoy Capital, said: “There is no real tracking of single or core buyers, who are largely on the sidelines.”
In recent days, investors have been captivated by an increase in options trading volumes, as well as a rise in the stocks of the companies most affected by this year’s selloff, including many of the stocks that had been heavily shorted by hedge funds.
In a sign of the bleak picture, markets fell lower on Friday in a volatile trading session, with the Nasdaq Composite closing up 2.6 percent for the week, ending a four-week winning streak. The S&P 500 fell 1.2%, paring its year-to-date losses of more than 11%.
Wall Street dealers cautioned that market swings could still increase, especially when a large portion of options expire on Friday.
Nowhere has the market turmoil been more evident than in shares of troubled retailer Bed Bath & Beyond, a meme favorite that’s once again lighting up message boards on Reddit.
Trading volumes for the stock multiplied this month in an unusual way, and on Wednesday it briefly soared to $30 a share, more than doubling on the year. Several investors have since cashed out, including college student Jake Freeman, who made $110 million trading the stock.
Freeman’s disclosure of a stake in drug company Mind Medicine was enough to attract other investors to the small-cap stock, sending its shares up 78% on Thursday in the kind of speculative fervor that has characterized the rise of the early meme-driven market. 2021
That frenetic activity offers little reassurance to investors looking for signs that the bear market rally in the S&P 500 and Nasdaq Composite can be sustained, especially as Federal Reserve policymakers raise interest rates to slow the North- American
Money managers have been waiting all year for a clear signal that they can dive back into the U.S. stock market, but instead have been met with a confusing picture of U.S. policymakers trying to slow down stubbornly high inflation.
“We’re not out of the woods yet,” said Charlie McElligott, a strategist at Nomura.
Additional reporting by Patrick Temple-West