Is this power of short sellers gone wrong? I think it's important to point out that a lot of Tuesday's rally is taking place on the backs of hedge funds who were poorly positioned for the impact of the Wuhan coronavirus and then went to work shorting "virus" stocks right in the downturn last Friday.
They didn't count on the tens of billions that China put to work propping up all assets. They didn't count on the notion that there were no real sellers to speak of, just sellers of the S&P futures and the selling stopped after a sense that the Chinese have gotten the situation under control and there hasn't been an expected spike in hospitalizations here, while it looks like China will be back to work next week. Most S&P index money is dedicated long money, anyway.
Let me give you some examples of what I am talking about. If you thought that there might be a closure of the Macau casinos, then you are right. If you thought that the stocks would go down on the announcement that they are going to close the casinos for a bit, you would know that would require negative revisions, so you world short them. But when the longs, the current shareholders, saw the news they didn't sell. Maybe a lot of that ownership is index funds, and they never sell. Maybe a lot of those longs now think the worst is over. Whatever, it is extraordinary that there is a shortage of sellers of stocks that represent companies where, normally there would be major sellers, time-size sellers as we called them, on the trading desk.
Or take Nike (NKE) . Here's one that was regarded as a prime stock to be sold short: Many of its shoes are made in China, and China has been a fabulous market for them. So why not short that one, it's got a double-whammy going against it?
Then you come in Monday and you get not one, but two upgrades of the stock. Then you find out that new CEO John Donahue is coming in to speak to large account this week, as well as going on camera to tell the story -- not of China -- but of personalization and Nike's technological edge. A good short spoiled.
Consider the stock of Ralph Lauren (RL) . One of the best shorts in this market has been clothing and apparel. Doesn't everyone know how weak Kohl's (KSS) , Macy's (M) and Target (TGT) were? PVH Corp. (PVH) reported a good quarter, and no one cared. So why not just short Lauren. Nope, Patrice Louvet has reinvented the place with elevated merchandise and selling products via the internet channel especially over Facebook's (FB) Instagram and Snapchat (SNAP) . What was once a drawback, a lack of China business is now a virtue. It's a homerun.
Many analysts have Clorox (CLX) as an underperform. When short sellers sees that designation --figuring that -- they have a loser in their hands. Clorox has been disappointing for some time. But not this time. No sellers develop.
Finally there is Tesla (TSLA) . While it is not in the S&P, it is in wonderland. Ever since the company made money two quarters ago, busting the short thesis, it's be a short-sellers nightmare. Remember shorts must have stock in hand, so they can sell it to those who actually buy it. But there's been a shortage of stock. So when someone like Ron Baron comes on, the hedge fund operator who has championed the stock from the get-go and uses a trillion dollar target, you will get a short squeeze where the brokers have no choice, but to close out your short for you. "Buy ins" are nightmares. But they are happening everyday in this stock and will keep happening until what we call "natural " sellers service.
We have a serious dichotomy in money running these days. Because so much money is indexed or closet indexed -- meaning they overweight or underweight certain groups in the S&P but they look pretty much like the S&P -- institutions like to have hedge funds as a hedge against their long funds. So these have dedicated short money.
That's where the real damage is. That's who is driving this market right now. They are doing a great job of it and it comes at their own expense.
