Are Short Sellers Getting Too Bold?

1.) MANUFACTURING – It’s easy to lose sight of the good things happening under the hood when you have all the negative press about the war. That’s not to suggest that the impact on investor psychology and oil isn’t an issue. It is. But let’s not miss the fact that the United States manufacturing sector just registered the strongest expansion since 2022. New orders are in strong expansion, showing the fastest pace since 2021. Retail sales advanced, better than expected. Private employment surged, almost 50% higher than expected.

2.) OIL / GOLD – Oil is now bumping up against downtrend resistance that was formed from the two previous oil price spikes in the last 20 years…2008 and 2022. Does that mean that oil HAS to stop going up right here? No. There’s additional resistance at $117. But I do believe April likely marks the top for crude oil in this Iran war cycle and in that I believe March marked the bottom for the S&P 500. I’m not trying to call the exact day of the bottom, and I never will. But it appears that March was peak fear for the S&P 500, and I think April will be peak fear for oil. Oil volatility (OVX) hit 126 on March 12. It’s at 91 this morning. That suggests fear is abating. If you look at the chart below, you’ll see a black demarcation line that points to the first day of the war – Feb 28. March 20 marked 15 trading days since the start of the war and the S&P 500 closed at 6506.49. It closed at 6575.33 last night. Was that THE bottom? Again, I don’t know, and I won’t attempt to call out an exact date as history does not repeat…but it does rhyme, which is what the chart is really telling you. The “process” of a bottom is certainly acting like it is taking hold. What isn’t taking hold though…so far…is a recovery in gold. Gold failed right at my trend level this morning, now down -3.6% today after tapping $4,800. Recall that $4725 was an important area to watch. What’s that tell me? The world is not ending. If it were, gold would be ripping higher.

3.) SHORTS – Short sellers are an integral part of a healthy market. They provide liquidity. But you have to think of short sellers as future buyers. At some point, every short has to be covered (bought back). That means buying stock. No exceptions. So when positioning gets crowded and the price stops going down, everything changes. Now those same sellers become forced buyers. That’s where the biggest moves come from. Not new narratives or speeches. Not better fundamentals. Positioning was just offsides, and we can measure that. Short interest across the Russell 3000 (a broad measure of the US stock market) is elevated relative to history. By most measures, median short interest as a percentage of float is near the highest levels in over a decade. Here’s a chart from Deutsche Bank showing the new 15-year highs in median short interest. That means a lot of bets against stocks. And when everybody leans the same way, it doesn’t take much to tip things the other way, often in a very fast, potentially violent way. We saw a bit of that on Tuesday with markets up 2-3% on the day. When the shorts are wrong, they’re trapped and have to become buyers. History appears to be pointing to those short sellers getting close to being trapped.