Equity Shorts Hit 10-Year High Amid Recessionary Pressures — Dollar Eyes Recovery

Key Takeaways:

  • Hedge funds short stocks at a decade-high pace.
  • Recession fears intensify ahead of key reports release.
  • The dollar index might rise against the dropping S&P 500.
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Equity Shorts Hit 10-Year High Amid Recessionary Pressures — Dollar Eyes Recovery

YEREVAN (CoinChapter.com) — Hedge funds are gearing up on bearish wages on US equities, betting that the month-to-date downward correction will continue amid worsening economic data and corporate earnings.

According to the latest data, the short positions on the US equity index S&P 500 (SPX) increased to roughly 321,000 contracts as of April 4, the most bearish reading since November 2011.

Equity shorts at a decade high. Source: Bloomberg.com
Equity shorts at a decade high. Source: Bloomberg.com

US Economy Faces “Storm Clouds”

Notably, as caution and low expectations prevail on the equity market, better-than-expected results could trigger another bounce, as was the case at the start of 2023, when experts rang recession bells.

For example, banking giant Goldman Sachs’ economists have consistently remained upbeat amid fears over the labor market and other economic “storm clouds.” 

S&P 500 index (SPX) daily chart. Source: TradingView.com  equities equity shorts dollar index dollar
S&P 500 index (SPX) daily chart. Source: TradingView.com

The Bank’s managing director Bobby Molavi noted the bearish tone of the “prevalent view” but was more optimistic than the majority of market participants.

“It increasingly feels like equities are caught in a channel. One that most believe (and are positioned) to see break on the downside and yet never seemingly does. The prevalent view seems to be that more things will break on the back of rapid rise in cost of capital.”

said Molavi

Despite the bank’s outlook, its clients cut their long positions on tech stocks at the fastest pace in 15 months.

Also read: Russia to Increase Air Defense Capabilities Near Finland — US in Damage Control Mode. 

S&P 500 in Danger

Bank of America (BofA) gave a bearish diagnosis to S&P 500, in tune with the decade-high equity shorts. The bank identified twelve “dirty dozen” factors that indicate the recession has already begun, even if the equity investors are “blissfully unaware.”

One is the Institute of Supply Management’s manufacturing index (ISM), which fell to 46.3%. According to BofA, 11 times the ISM fell under 45%, out of the 12 on the record, a recession followed.

ISM index approached 45. Source: BofA report.  equities equity shorts dollar index dollar
ISM index approached 45. Source: BofA “dirty dozen” report.

Moreover, ISM manufacturing PMI levels near 45 have coincided with a so-called earnings recession.

The latter is brought on by two consecutive quarters of negative earnings growth. According to BofA, such confluence happened on at least four occasions during the last few decades during crises, in 1991, 2001, 2008, and 2020.

equities equity shorts dollar index dollar
Recessionary ISM coincides with negative EPS growth. Source: BofA “dirty dozen” report.
Also read: US Bank Outflows Hit $1T Ahead of Fed’s Rate Hike Decision.

US Dollar Eyes Sharp Recovery

The stocks’ loss could be the US dollar’s gain as investors seek to hedge their funds against the shorted equities market.

The aforementioned bearish prognosis for the S&P 500 came ahead of the Consumer Price Index (CPI) report, the Fed’s gauge of inflation due tomorrow, along with the Fed’s March meeting minutes.

The Fed has already agreed on raising interest rates by a quarter-basis point and could continue the hawkish stance if the upcoming CPI report does not show much improvement.

Additionally, the rising interest rates typically increase the dollar index (DXY). The latter shows an erratic inverse correlation with the risk-on equities market, underscoring the investors’ tendency to turn to the greenback for returns in times of potential recession.

equities equity shorts dollar index dollar
Dollar index (DXY) daily chart. Source: TradingVIew.com

The dollar index dropped 0.52% on April 11, paring its April 10 gains. However, a daily correction is not enough to indicate a bias reversal. The upcoming CPI and labor market reports will shed more light on the DXY expectations and the adequacy of the decade-high equity shorts.

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