The S&P 500's rally has stalled near record highs as traders wait on Wednesday's US CPI report, which will shape September Fed rate-hike odds. Citi's David Chew says short sellers are already sitting on notable losses, and the outstanding short base could fuel further gains through short-covering if the rally persists.
The S&P 500's push to record territory has left short sellers nursing notable losses, according to Citi, even as the index's own advance has stalled ahead of Wednesday's inflation data.
Rally stalls as traders await CPI
The index's rally stalled last Wednesday, when a US-Iran deal failed to materialize within its expected timeline. Price action has stayed mostly rangebound since, with only Friday's softer-than-expected non-farm payrolls report offering support.
That report triggered a dovish repricing in rate hike expectations, with the odds of a September hike falling to 38% from 54% before the release. Those odds have since normalized back to 48%, even as the unemployment rate fell further to 4.1%.
Bears squeezed as shorts pile up losses
Citi research analyst David Chew said in a note published Monday that the advance has been driven mainly by new long positioning rather than short covering, leaving bearish investors offside. According to Chew: "S&P 500 shorts are particularly vulnerable", with the aggregate short book's average per-position losses nearing 4%.
Going short generally means selling stocks or index futures in hopes of buying them back lower, a bet that turns costly once an index keeps climbing — the dynamic behind short selling squeezes. Chew noted the outstanding short base sits in the 91st percentile of its three-year range, leaving room for further short-covering if the rally persists.
Wednesday's CPI print is the next test
Attention now shifts to Wednesday's US CPI report, which will feed directly into the September FOMC decision and Fed Chair Warsh's Jackson Hole speech. A hot print would likely revive rate-hike bets and pressure stocks, while a soft one could ease tightening fears and extend the rally.
On the charts, buyers want a break above the record high to extend gains toward the 8,000 level, while sellers are eyeing a drop back toward the 7,725 support and, below that, 7,640.
Sources: Investinglive, MarketWatch
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