Goldman: Last Week's Stock Rally Wasn't Driven By The Bulls

According to Goldman Sachs, stocks with high short interest outperformed those with low short interest during the Eurobailout rebound rally we had from May 7th to May 12th. S&P 500 stocks with high short interest returned 7.4% on average, while those with low short interest just 5.2%.


On the other hand, shorts have been pressuring stocks since the last market peak. Highly shorted stocks underperformed less shorted names over the period 4/23 – 5/13.


Thus there’s a good explanation for the market pop we saw after the European bailout was initially announced.


In the wake of last week’s 6.4% sell-off, short covering explains relative stock performance this week. Following Sunday night’s European package, the S&P 500 rallied 5.5% over the first three days of the week. Monday’s 4%+ rise prompted a host of questions from clients regarding the flavour of the move higher. Our analysis of S&P 500 performance at the start of the week confirmed what many had suspected: the initial rally in the S&P 500 from the 1110 level was driven in large part by short covering. From last Friday’s close through Wednesday of this week, the S&P 500 stocks with the highest short interest levels rose 7.4% as compared to the lowest short interest stocks, which rose a less-impressive 5.2% (see Exhibit 3 and 25). Despite that 220 bp spread, high short interest stocks have still underperformed low short interest stocks since the recent market peak (see Exhibit 4).

Shorts ran for cover. A stable Europe, even with a giant short-term bailout bandaid, is their enemy. Yet at the same time, this shows the bulls were pretty timid and may be exhausted for now. As we saw at the end of last week, already the rally has begun coming off. Shorts re-establishing as European bailout criticism mounts?


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