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Dow Futures Plunge as Short-Sellers Bet on Another Crash

Last Updated September 23, 2020 1:50 PM
William Ebbs
Last Updated September 23, 2020 1:50 PM
  • Bets against the stock market have risen to their highest level in years as investors grow skeptical of this rally.
  • Stocks have quickly rebounded from the coronavirus crash, but it may be too soon to celebrate.
  • Dow futures fell 200 points at the start of Sunday evening trading. This points to a lower opening on Monday.

Do you think this bull market is too good to be true? You aren’t alone. More and more investors are betting on a crash.

Short interest in the stock market has risen to its highest level since January 2016 . And this looks like an omen for another massive correction in the near term.

With so much macroeconomic uncertainty swirling around financial markets, the days of this bull market look numbered.

Stock Have Recovered Much of their Coronavirus losses

Stocks have posted a massive rally over the last month, bringing the S&P 500 up from its 52-week low of 2,237 on March 23 to a closing level of 2,875 on Friday.

That’s a 28% rebound in just under a month.

The market looks overbought as stock prices rebounded dramatically over the past month. | Data by ycharts.  

It’s hard to justify this dramatic move upwards. Coronavirus has           infected almost 2.4 million people around the globe , including 755,533 in the United States alone. Thousands of people are dying every day, and there is no vaccine in sight. To make matters worse, lockdowns and travel restrictions threaten to create a wave of bankruptcies in the travel sector that could have a domino effect on the rest of the economy.

The Trump administration has taken steps to stem the bleeding in the economy. And it looks like the government may pass another massive stimulus package in the coming weeks . But does this justify the irrational optimism in the markets? Many investors don’t think so.

Low interest rates and deficit spending can’t make up for sustainable economic activity.

Short Positions Pile Up in the S&P 500

According to data research group S3 partners,  short interest has climbed to its highest level since 2016. The value of bets against the SPDR S&P 500 ETF has risen to $68.1 billion–up 63% since the start of the year . The portion of available shares sold short has risen from 14% of the float in January to 27%  of the float. This indicates that a large percentage of investors believe the market is overvalued.

Shorts have particularly focused on the travel and hospitality sector, with names like Carnival Cruise Lines (NYSE: CCL), Wynn Resorts (NASDAQ: WYNN), and Marriott (NASDAQ: MAR) taking most of the heat.

Travel and hospitality names have posted the biggest rallies in the last month. Investors are betting that the good days won’t last.  Data by ycharts.

Investors should also prepare for massive volatility going into earnings season because many companies could report worse-than-expected results due to coronavirus lockdowns and supply chain disruption in China. 2019 already experienced an earnings recession , and the problem will undoubtedly get worse without stock buybacks to prop up share prices.

Stock Futures Dip

Stock market futures have dipped in evening trading, with the Dow Jones down over 200 points and the S&P and NASDAQ both down around 0.8%. This points to a weak open on Monday.