Changing dynamics: Bears merely less bullish in today's stock market

When someone identifies as a bear, normally it means they’re selling. In this market, where anyone who dares do that gets crushed, it just means you’re a little less bullish than everyone else.

That’s according to a survey by the National Association of Active Investment Managers, which found that in the current distribution of sentiment, a bear is someone who is 75 per cent invested in stocks.

“You hold your nose and you buy,” David Kudla, chief investment strategist at Mainstay Capital Management, said in an interview on Bloomberg Television. “Stocks have been divorced from fundamentals.”

Bears are bulls and shorts are long. It’s borne out in earnings season, too, where companies that raise financial guidance are being punished, while those with no profits are surging. Definitions are warping when heavily shorted shares such as GameStop Corp. and Bed Bath & Beyond soar, partly due to interest from day traders who have gathered in Reddit’s WallStreetBets forum to battle professional speculators. A basket of stocks tracked by Goldman Sachs Group Inc. jumped 4.5 per cent Monday, extending its 2021 gain to more than 30 per cent.

According to NAAIM, whose members include investment advisers from 200 firms overseeing more than $30 billion, the most-bearish group typically has a net-short position averaging 80 per cent in data going back to 2006. With all bulls and bears included, the managers have tended to be 65 per cent long in stocks. Last week, the overall exposure stood at 113 per cent, a three-year high.

Hedge funds, in particular, are rushing to buy back shares that they had wagered against. Their short covering of single stocks last Tuesday reached the highest level since April 2018, data compiled by Goldman Sachs’s prime brokerage show.

Signs of market froth have been building for months. But the latest investor sentiment reflected in earnings reactions is particularly strange. Companies with improved outlook are usually rewarded with better share performance. This year, those that have raised guidance saw their stock trailing the market by 20 basis points on the first day post-announcement. That compared with an average above-market gain of 2 percentage points since 2007, according to data compiled by Bank of America Corp.

“The best and worst performers had nothing to do with earnings outlooks,” BofA strategists including Savita Subramanian wrote in a note. “When performance decouples from fundamentals, speculative investing, or ‘bad micro’, is a likely culprit.”