Hedge funds are massively « short »

According to head of market analysis at Bank of America Corp., Mary Ann Bartels, short positions initiated by hedge funds on the S&P 500 futures reached their highest level since June 2008.

According to the Commodity Futures Trading Commission (CFTC) data, the net short positions totaled $ 25 billion on Aug. 23 against 21.5 billion dollars one week earlier. "The last time we saw such volumes of short positions on the S & P 500, equity markets fell by 46 percent," warns Ann Bartels. The S & P 500 has fallen 18 percent since April 29 when it reached its three years highest level.

However, For Ann Bartels and her teams, this sharp increase in short positions could also trigger the beginning of a bull signal. Indeed, short selling, which involves selling borrowed securities, generates profits when sellers buy back the securities at a price below the initial sell price, before returning them to their owner. Thus, some investors may bid up prices by buying shares to cover their short positions.

According to Mary Ann Bartels, long-short funds who bet on falling or rising shares, reduced their equity exposure from 33% to 31% of their assets. Macro funds, which bet on economic trends, have cut their positions in the S & P 500, Nasdaq-100 and the commodities, and bought back their short positions on emerging markets and on the MSCI EAFE index.

Market-neutral funds have strengthened their positions on stocks, betting on an increase of 7 to 10%.

Is it enough to become bullish? Not sure! A report published last week by Investors Intelligence indicates that the weekly bulletins analyzing the stocks’ behavior have become as pessimistic as they were at the beginning of July 2007.