The chart below, courtesy of Bespoke Investment Group, shows how the most-shorted stocks have actually been the ones leading the market rally in the past few weeks.
What's going on here?
Bespoke points out that Tesla and Green Mountain Coffee Roasters alone – two heavily shorted stocks – are both up over 20% today on company-specific news.
There's also a bigger trend unfolding as the rally that began in November continues to extend itself further and further.
While dividend-paying, defensive types of stocks have led most of the rally, investors seem to be rotating out of that group and into riskier – and perhaps more heavily shorted – names.
Miller Tabak Chief Economic Strategist Andrew Wilkinson explained in a note to clients yesterday (emphasis added):
We’ve noticed a perhaps interesting trend emerging between companies that consistently enhance their dividends and the benchmark S&P 500 index. Our chart of the day shows that as the stock market powers to new highs, Aristocratic dividend paying names are starting to underperform and perhaps indicating that equity buyers have become less concerned with what they are buying.
If this erosion of the excess return often provided by consistent dividend payers is maintained during the month of May, it will be the first time since 2009 when the benchmark index rose in that month and exceeded the performance of the Aristocrats club. We should note too that that May 2009 was shortly after the bear market low when investors bought anything that had a pulse. Are we witnessing the same thing today after the Fed has crushed the yield curve?
Looks like we're seeing a new leg of the market rally now.
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