Short Positions in US Stocks Reach New High, Goldman Sachs: A Short Squeeze in Obscure Sectors is Brewing

Goldman Sachs analysis points out that the median short interest in S&P 500 index constituent stocks has risen to 3% of total market value, reaching the highest level since the end of 2011.

Bloomberg data shows that short positions in US and Canadian stocks have increased by nearly $100 billion since late April, reaching a historical high of $2.13 trillion.

The Goldman Sachs traders from Gail Hafif's team believe that the extreme short structure is approaching a turning point, and the next round of US stock market gains will be driven by short squeezes in lesser-known sectors outside of tech giants. When short sellers are forced to cover and return shares, mechanical buying will amplify the gains in these sectors, and the main risk in the market now lies in the over-concentration of funds in momentum stocks.

Currently, short positions are highly concentrated in defensive sectors, with the median short interest in the healthcare sector reaching a 30-year high, and the utility and consumer staples sectors are also close to historical extremes. Although the absolute size of short positions in the information technology sector is the largest, short positions in industries such as industrials, finance, and energy are also seeing widespread increases.

Historical data shows that short covering has high elasticity; when geopolitical tensions eased on March 31, the S&P 500 index rose by 2.9%, and Goldman Sachs' most heavily shorted stock portfolio surged by 7.1%. In contrast, the current AI theme has driven the market to rebound nearly 19% from the low, and Goldman Sachs' US Volatility Panic Index has also plummeted from a high of 10 to 2.6.

Signals of market fund rebalancing have emerged, with hedge funds last week reducing their holdings in consumer staples at the fastest pace in more than five years, and instead making significant purchases in non-essential consumer goods. Chris Senyek's team at Wolfe Research points out that if future yields decline, consumer stocks that are sensitive to interest rates, such as housing, dining, and cruise lines with equal weight, will outperform the market.