Speculators are abandoning money-losing positions that stocks with the closest links to the U.S. economy will fall as America’s most-hated shares stage the best rally in a year relative to the broader market.
The 20 stocks with the highest short sales in the Standard & Poor’s 500 Index rose an average of 5.1 percent in December, compared with 0.7 percent for the full gauge, according to data compiled by Bloomberg. The performance gap is the widest since January 2012. Companies from U.S. Steel Corp. to J.C. Penney Co. are gaining at the expense of phone companies and utilities, which usually do best when the economy contracts.
Market bulls say the capitulation underscores growing confidence in the U.S. recovery, while bears say the rally shows indiscriminate buying as earnings estimates fall close to a one-year low. The change echoes money manager Laszlo Birinyi’s prediction that the four-year bull market will finally attract investors who have stayed away from equities.
“Let’s put it this way, I made more money on my longs than on my shorts,” Gilles Sitbon, who helps oversee $2.1 billion at Sycomore Asset Management in Paris, said in a phone interview on Jan. 3. His Sycomore Long-Short Opportunities fund rose 15 percent in 2012. “It’s not just hard to be short, it is painful.”
Equities tend to rally when companies with the most short interest outperform. In March 2009, the least-loved shares beat the S&P 500 by 8.1 percentage points just before American stocks posted the biggest annual increase in six years. January’s advance came as the benchmark gauge was starting a three-month, 12 percent advance.
The S&P 500 soared 13 percent in 2012, adding almost $1.9 trillion to the value of stocks in the best increase since 2009. The measure has risen within 6.7 percent of its 2007 record as the Federal Reserve tied monetary policy to unemployment and announced a third round of bond purchases, while the European Central Bank pledged to buy as many securities as needed to lower borrowing costs and preserve the euro.
The S&P 500 fell 0.4 percent to 1,460.01 at 10:03 a.m. in New York today.
U.S. shares have moved up steadily since Nov. 15, when House Speaker John Boehner reported progress in budget talks with President Barack Obama. Companies with the highest bearish bets climbed 13.8 percent on average since then compared with a 8.4 percent return in the S&P 500.