Hedge Funds Turn Short After Biggest Squeeze Since 2020

Hedge funds swung back to shorting U.S. stocks last week, net selling after the biggest squeeze since November 2020 as the S&P 500 hit a record.

The reversal shows institutional investors failed to build a sustained long consensus after the relief rally, with short-selling outpacing buying by 2.2 to 1 in macro products, according to Goldman Sachs' latest Prime Brokerage weekly report.

U.S. long/short total leverage fell 3.9 percentage points to 204.2 percent, the sixth percentile of the past year, while net leverage rose 0.8 point to 53.6 percent. The fundamental long/short ratio climbed 1.9 percent to 1.712, the 97th percentile. Software and internet names led the squeeze — Atlassian jumped 30 percent and Twilio 25 percent for the week, lifting the IGV software index about 3 percent — while semiconductor longs such as Micron and AMD slipped.

The shift leaves the market exposed to this week's data gauntlet: July CPI on Wednesday (core seen up 0.2 percent month over month and 2.5 percent year over year), PPI Thursday and retail sales Friday, alongside $125 billion of Treasury auctions. A hot inflation print would revive the Federal Reserve's hawkish debate and pressure an index that has already priced in September rate cuts.

Financials Extend Buying Streak as Energy Selling Returns

Financials were the biggest net-buying sector for a fourth straight week, with a buy-to-sell ratio of 3.8 to 1 and net buying intensity at plus 1.0 standard deviation. Trading and payment processors plus capital markets led inflows, while banks and insurers saw outflows. Overweight in financial services is the highest in three years, and underweight in insurance the deepest.

Energy flipped to net selling after seven straight weeks of buying, with short-selling outpacing buying about 4 to 1. Net exposure still sits at 4.0 percent of total U.S. net market value, the 95th to 98th percentile, and the long/short ratio of 1.87 is at the 99th to 100th percentile, leaving positioning stretched even after the pullback.

Record Highs Meet Skeptical Positioning

The S&P 500's 26th record of the year — up 13.7 percent on a total-return basis through Aug. 7 — has been driven by Nvidia, Micron and Apple, which together contributed more than 3.6 percentage points of index gains. Second-quarter earnings are on pace to grow 29 percent year over year, with revenue up 15 percent, the fastest since the fourth quarter of 2021. Yet single-stock flows were roughly flat last week, with 10 of 11 sectors seeing higher trading activity.

The weak July payrolls report — a drop of 23,000 jobs versus an 80,000 consensus, with a combined 103,000 downward revision — sent the dollar to its worst week in about three months, lifted gold to $4,339 an ounce and pushed WTI crude down to $77.98 a barrel. The 10-year Treasury note sits within 0.6 percent of its 52-week low after the Federal Reserve held rates at 3.50 to 3.75 percent on a 9-3 vote, with three dissents favoring a hike.

This article is for informational purposes only and does not constitute investment advice.