Are We In A Bubble?

We have been following the short interest in the U.S. stock market closely because the shorts have been burned badly ever since the bottom in March 2020. This was the greatest rally in highly shorted stocks ever. Furthermore, early in 2021 a bunch of highly speculative stocks exploded partially due to social media activity. Some of those were highly shorted. This was the worst possible scenario for short-sellers. Many made sure to avoid shorting or covered anything with a high short interest even if they were bearish on that idea.

Now we are back to share with you the final level of short-seller doom. As you can see from the chart below, the median short interest in S&P 500 stocks is 1.5%. This is the same level it bottomed at during the peak of the tech bubble in 2000. The short-selling percentage can’t go negative. Essentially, it can’t get much lower than it is now. Interesting, min-vol stocks are underperforming badly. This covers the gambit of investors not wanting to take any precautions or hedge their long exposure.

We are probably in one of the best markets for short selling in history because there are so few shorts. Keep in mind, this only shows data from the S&P 500. Most of the high opportunity shorts are not in the index. Structurally unprofitable businesses usually don’t make it to the large-cap index.

Goldman Sachs came up with a checklist to determine if the market is in a bubble. As you can see, there is a new era of technology that is/are supposed to change the world, booming corporate activity, easy credit, low rates, rising leverage, frantic speculation, high market concentration, new valuation approaches (price to TAM), excessive price appreciation, and extreme valuations. The only things we don’t have, according to this list, are a late-cycle economy and accounting scandals. There probably won’t be any scandals until after the bull run ends.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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