Bearish stock bets surge the most since March as volatility emboldens short-sellers

• Short interest in individual US stocks leaped by the most since March last week as volatility rocked investor sentiments, JPMorgan said in a Tuesday note.
• Bearish positioning increased to just above 7% of all US stocks available for lending last week, the highest level since July. The metric sat at roughly 6% at the end of August.
• The rise in short activity "is a worrying development, especially for US stocks where the short base still stands at rather low levels," strategists led by Nikolaos Panigirtzoglou said.
• Still, the bank's other gauges for bearish interest show stable levels for SPY ETF shorts and growing optimism about stock futures.
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Short-sellers are rushing back to the stock market after the summer's rally gave way to choppy price action, JPMorgan analysts said Tuesday.

Bearish stakes jumped above 7% of all US stocks available for lending last week, the highest level since July and the biggest increase since March's market plunge, according to the bank. The gauge sat at roughly 6% in August as major indexes repeatedly notched record highs.

Short positions on non-US stocks saw a smaller climb but sat at just below 9% of all available shares.

"The recent rise in the short base at individual stock levels is a worrying development, especially for US stocks where the short base still stands at rather low levels," strategists led by Nikolaos Panigirtzoglou wrote in a note.

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The trend suggests de-risking among investors, and there is room for the short base to increase further, considering it still sits well below pre-pandemic levels, the team added.

The data also points to shifting sentiments following the introduction of volatility through September. Major indexes sank earlier in the month when investors ditched tech giants' high-flying valuations and looked for value elsewhere. Though sell-offs have since moderated, volatility remains heightened, and indexes are far from retaking their early-September peaks.

Still, not all areas of the market are taking on more bearish bets. JPMorgan's broader proxy of short interest — which tracks the proportion of SPY US Equity ETF shares available for lending — is stable after dropping through the summer.

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A separate proxy tracking asset managers' and leveraged funds' positions in US stock futures has jumped in recent weeks, indicating more bullish outlooks among institutional investors.

The team maintained its optimistic forecast for stocks. While hopes for stimulus measures are all but dashed and the US economic recovery shows some signs of slowing, there's ample cash on the sidelines ready to push stocks higher, according to the bank.

"We see plenty of upside in equities in the medium-to-longer term given still low overall equity positioning," the strategists said.

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