A report released by Goldman Sachs earlier this month showed a record decline in investor interest in short selling the S&P 500, as all remaining short sellers have lost heavily in the past few months. Societe Generale’s strategist, big short Albert Edwards (Albert Edwards), recently teased on social media that he was the last short in the market.
The reason why the shorts lost so much is because of the massive easing policy adopted by the Federal Reserve, which has supported the rise in U.S. stocks. Long retail investors and fund managers are now convinced that the Fed will always lend a helping hand when the market crashes.
Amid this unprecedented optimism, (a sentiment that even surpasses the frenzy of the 1999 Internet bubble), some market professionals have reacted in another unprecedented way – by being bearish on U.S. stocks, with the result that their returns this year have been completely crushed by those new to the market.
On Tuesday, Interactive Brokers Chairman Thomas Peterffy discussed the “explosive growth” of options trading, which is largely driven by retail investors. These retail investors have been rushing to increase their holdings in tesla and large technology companies, a process that creates a positive feedback loop that drives up stock prices and leads investors to buy more stock options.
In addition, he mentions a phenomenon.
“Our clients were traditionally long, and a week ago things changed: they switched to buying puts, and the demand for their vanilla options increased dramatically, closing out their long positions.”
He stated.
“The Robin Hood (foreign online trading platform) guys are long, while IB clients are short. It’s a very interesting situation that has never occurred in our history where our clients as a whole have been net short the market. And now it has actually happened.”
In short, a travesty is playing out: disgusted by the Fed and the blind optimism of retail investors, entire brokerage firms serving people with high net worth and professionals are shorting U.S. stocks.
Unfortunately, singing the Fed’s praises doesn’t end well. Now the Fed is still on the side of the retail investors and the long side, who loses and who wins for a while who is still unclear.
Of course, from the performance of retail investors 14 times higher than hedge funds, Robin Hood effect may continue. Until the Fed realizes the potentially disastrous consequences of the liquidity it has unleashed.
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