The recent rally in the Nasdaq 100 has been referred to as an oversold bounce aided by a drop in bond yields. Beneath the surface, however, the surge was largely driven by hedge funds who were forced to pare their bearish bets to limit losses — rather than genuine interest.
While those funds were net buyers of stocks for a fifth straight day, short covering outpaced long sales by a ratio of 4 to 1 on Tuesday, according to data from Goldman Sachs Group Inc.’s prime brokerage unit. As the spike in the tech-heavy gauge didn’t reflect appetite for risk, some analysts say those gains would likely be short-lived.
“We see yesterday’s move as short covering without legs,” said Andrew Brenner, the head of international fixed-income at NatAlliance Securities in New York.
Short sellers had boosted their wagers as the Nasdaq 100 tumbled more than 10% from a February record. Last week, large speculators — mostly hedge funds — were most bearish on Nasdaq mini futures since early October, according to data compiled by Commodity Futures Trading Commission.
Those heavy bets set the stage for a short squeeze as the Nasdaq 100 surged 4% Tuesday, the most in four months. Among Goldman’s hedge-fund clients, short covering in unprofitable tech firms helped the group halt seven straight days of selling and score the third-biggest net buying of the year. Over the past two days, a Goldman basket of the most-shorted tech stocks has jumped almost 7% — more than double the return of the Russell 3000.
The Nasdaq 100 climbed as much as 1.5% Wednesday before erasing gains. Volatility in the tech-heavy gauge is picking up as the stay-at-home trade lost some luster amid signs of an economic rebound.