The Big tech mega-rally that doesn’t appear to want to slow down any time soon is causing a major headache for short traders on the equity futures market.
Investors use equity futures to lock in prices for buying or selling equity indices or stocks to hedge against potential price movements that would be unfavourable to their investment positions.
They are also used to speculate on the direction of future market movements to make a profit.
But speculators who have placed their bets on a retraction of the US stock market and a peak in Big Tech stocks are now witnessing a short squeeze.
“US equity futures had a sharp turn to bullish flows halfway through last week and ended the week with $18 billion new longs in S&P,” said City Bank analysts.
“The week started slow in terms of futures flows, but the modest index gains in S&P 500 in the second half of the week were accompanied by large shifts in positioning leading to the establishment of $18bn new longs.
“Nasdaq futures also had $7.4 billion new longs, which once again extends net positioning.”
The data suggests that nearly $30 billion of short positions ‘are out of the money’, meaning that these contract holders face losses if they choose to settle or exit their positions.
The average S&P short position entry price is 4,811 against this Tuesday’s pre-market price of 5,021. The S&P surpassed 5,000 for the first time in history last Friday.
“Long positioning on Nasdaq is very extended and completely one-sided,” added Citi.
This comes as little surprise, given the portfolio weightings to tech stocks (which comprise the majority of Nasdaq-listed companies) are at their highest levels since August 2020, according to the Bank of America (NYSE:BAC).
A survey conducted by the bank showed that investors are going “all in” on tech stocks, with 61% of respondents going long on the Magnificent 7.
Such is the dominance of this M7, being Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Nvidia, Facebook (NASDAQ:META) parent Meta, Tesla (NASDAQ:TSLA), Google parent Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT), that they comprise roughly 50% of the entire Nasdaq performance at the latest estimations.
Market enthusiasm over Big Tech stocks went into overdrive in 2023 and has remained exceptionally bullish this year on the back of artificial intelligence hype and the prospect of lower interest rates (even if the Fed warns against too much optimism in this regard).
Though going short after such a bullish 2023 hardly seemed like a fool's strategy, it has so far failed to pay off.
The squeeze is less prevalent in the European markets.
“Gross exposure continues to fall in European positioning with investors unwinding both long and short positions,” said City. “However, the overall net long position continues to be relatively bullish, but with fading momentum..