LIVE MARKETS-Short sellers could prompt stock market "melt up"
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SHORT SELLERS COULD PROMPT STOCK MARKET “MELT UP"
A stock market rally that has sent the S&P 500 .SPX and Nasdaq Composite .IXIC to record highs is being aided by short sellers who are not buying into stock strength, said Brian Reynolds, chief market strategist at Reynolds Strategy.
And their continued contrarianism could help to propel stock prices higher still in the coming months.
“Investors have continued to fight this bull market by taking short selling to record highs,” Reynolds said in a report. “This increased short selling raises the potential for a 'melt-up' in stock prices.”
Stocks rebounded quickly after a selloff prompted by U.S. President Donald Trump’s larger than expected tariff announcement on April 2, and Reynolds notes that debt-fueled stock buybacks have been key to the rally.
But while stocks gain, investor short positions have also grown and short-selling as a percentage of shares outstanding has risen to a record high, according to data by NYSE.
Reynolds said that a move above the 6,200 area in the S&P 500 .SPX would likely trigger margin calls and further price gains. The index is just over 6,210 on Wednesday.
Meanwhile pension funds are allocating a record share of their investments to credit, which companies use to finance share buybacks.
With earnings slowing at the same time that debt financed share repurchases and forced short covering push prices higher, “there is the potential for valuations to become stretched, forcing investors into difficult choices,” Reynolds said.
He recommends investors wait to sell stocks until they “significantly” clear one standard deviation above the trend, which would be around 6,500. He adds that with the credit-led bull market likely to persist for some time, pullbacks should be brief.
(Karen Brettell)
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