(Bloomberg) — A counter-intuitive trend is emerging in this volatile stock market: Short-term interest rates are falling again as investors cash in from the market.
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According to Ihor Dusaniwsky, head of predictive analytics at S3 Partners, who collected data through mid-September, short positions fell $12 billion for the Russell 3000 in the third quarter after traders suffered market value losses of about $59 billion. That’s a 6% drop on an average short position of $986 billion.
Wild swings have been a feature of the stock market this year, making life difficult for bulls and bears, even as the S&P 500 index fell 20%. Just two weeks ago, short sellers had to endure a heart-pounding four-day 5% rally that forced many to cover bets that ultimately paid off. The benchmark index has already seen 79 days in which at least 400 members moved in the same direction – on pace for most in data going back 25 years.
“While shortsellers were not backing their positions while winning, they were actively removing chips from the table as the throws came up,” Dusaniwsky said. He added that they have reduced their exposure due to the recent extreme volatility in the markets thanks to the Federal Reserve.
Traders are now waiting for further guidance from Fed Chair Jerome Powell. Markets are betting that the Federal Open Market Committee will rise by three-quarters of a percentage point on Wednesday and signal rates will rise above 4%. While a case could be made to go bigger, there’s a risk that the shock of a 100 basis point gain on Wednesday could add to recession jitters.
As to why short-term interest rates have declined, April LaRusse, chief investment specialists at Insight Investments, says it’s difficult to be absolutely sure that markets can continue to fall.
“You’ve had a big sale. People say, ‘Okay, there’s a lot of bad news in the price already. Let’s not be so strong in our positioning,” she said. “That’s probably what you see there.”
Still, there are signs that fear has arisen beneath the surface about explosions in individual companies. The appetite for protection against an index-wide decline in the S&P 500 over the next three months has slumped with the stock market, pushing the put-to-call ratio to a new year-long low. But data collected by Credit Suisse’s derivatives strategists shows that the opposite has happened at the single-stock level. A similar ratio jumped to a year-on-year high as company-specific announcements sparked large stock reactions.
“We would be very careful about taking directional bets here,” Matt Miskin, co-chief investment strategist at John Hancock Investment Management, said in an interview. “We’re just trying to find those companies that can afford us revenue, are more defensive in nature and minimize any downside risk.”
(Updates with context in third paragraph)
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