As retail investors rush to buy U.S. stocks on dips, hedge funds are heavily shorting

As retail investors rush to buy U.S. stocks at low prices, ignoring negative news and uncertainties, hedge funds are heavily shorting the market. Goldman Sachs trader Robert Quinn pointed out that despite the Nasdaq's strong performance in recent weeks, new short positions have surprisingly far exceeded long positions during the same period.

According to the COT (Commitments of Traders) data from May 6 to 13, there has been a massive shorting activity in the market, reaching $11.1 billion. Although there were also $4.2 billion in new long positions, the overall net long position still decreased by $6.9 billion.

The main force behind the shorting is hedge funds. Quinn noted that hedge funds had a net selling amount of $7.3 billion, with short positions surging to $9.4 billion. Other types of investors also saw their net long positions decrease by $830 million. Asset management firms and non-reporting investors bought $940 million and $300 million, respectively.

However, it should be noted that the "surge in short positions" by hedge funds is not entirely a judgment on market direction; it may also be an arbitrage operation to hedge against other long positions.

Nevertheless, the scale of shorting by hedge funds remains quite unprecedented, highlighting their skepticism about the rise of the U.S. stock market. The recent three COT reports show that the cumulative short amount by hedge funds has reached $25 billion, the largest scale in at least the past decade.

The proportion of hedge fund short positions to total open contracts has reached 41%, the highest level since February 2021.

In addition, some CEOs' statements seem to align with hedge funds, appearing to side with "smart money." Typically, CEO confidence is positively correlated with U.S. stock performance, but there has been a significant deviation currently.

Since U.S. President Trump announced a 90-day suspension of tariffs, the U.S. stock market has experienced a significant rebound against the backdrop of active buying by retail investors. This Monday, even Moody's downgrade of the U.S. rating did not deter retail investors, who recorded a staggering net buying amount of $5.4 billion, leading to a V-shaped reversal in the U.S. stock market that day At the same time, market expectations for the Federal Reserve's interest rate cuts have significantly declined.

In addition, the "hard data" over the past few months has remained resilient, supporting growth expectations and the stock market, while the "soft data" has fluctuated sharply. The University of Michigan Consumer Confidence Index highlights this point, showing a collapse in consumer confidence and a surge in inflation expectations.

Financial blog Zerohedge commented that Goldman Sachs' trading department believes that only three things matter: CTA, buybacks, and retail buying. Currently, CTAs are buyers in any situation, retail investors continue to buy on every dip, and year-to-date buyback authorizations have just reached an all-time high. Good luck to the short sellers.

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