Updates with post on US markets
US stocks hit record highs; Nasdaq out front, up ~1.5%
Comm Svcs leads S&P sectors; Utilities weakest group
Euro STOXX 600 index up ~0.2%
Dollar ~flat; crude edges up; bitcoin up >1%; gold down ~3%
US 10-Year Treasury yield rises to ~4.02%
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WHY THE SHORT SQUEEZE IS HAMMERING THE 'QUALITY FACTOR'
The recent rally in heavily shorted stocks has sent shockwaves through factor-based strategies, particularly the Quality factor.
Since the market bottomed in April, a basket of the most shorted U.S. equities has more than doubled, with a staggering 30% surge just since early September, according to strategists at Goldman Sachs.
The "Quality factor", a long/short basket pair representing the outperformance of firms with high returns on equity, low leverage, and stable earnings relative to a basket of stocks with the opposite financial metrics, has jumped by 4% recently.
However, that rebound comes on the heels of a 17% drawdown since July, the factor's sharpest decline in recent years outside of late 2020 and early 2021, they note.
What's striking is that this squeeze isn't over. The Goldman strategists say short interest across the S&P 500 .SPX remains elevated, with the median stock showing short positions equal to 2.3% of its market value - well above the long-term average, citing data from FINRA.
This suggests there's still fuel for further upside in low-quality names, and continued pressure on the Quality factor. A standout example is Beyond Meat BYND.O which soared over 240% last week, despite weak fundamentals.
The company has struggled with weak sales as demand dropped for its plant-based meat patties over the past four years, triggering job cuts and measures to manage its debt pile.
The Quality factor is inherently vulnerable during short squeezes. When "low-quality" names like Beyond Meat rally en masse, the strategy suffers disproportionately.
From a fundamental perspective, Quality continues to carry a large valuation premium relative to the past few years, the strategists note.
The median stock in the "high quality" long leg of the basket pair trades at a forward P/E of 25x, 2.1 times the 12x P/E of the median "low quality" constituent, according to Goldman's estimates.
(Joel Jose)
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