Economy And AI Push Make Shorting US Stocks Dangerous, 22V Says

Anyone looking to bet against US stocks this month would be wise to consider the strength of the American economy and ongoing enthusiasm around artificial intelligence.

That’s the view at 22V Research, where strategists say an increase in consumer spending and investments in AI are likely to support productivity, allowing firms to deliver the profits needed to power stocks higher.

The commentary lands in a market that had become volatile in recent weeks as investors grew nervous about the impact of tariffs on the economy and monetary policy at the same time that spending on AI seemed to become untethered to profitability. The S&P 500 Index fell as much as 5.1% from its October record before staging a rally last week — underscoring the perils of shorting a market prone to big swings.

“Being short here requires high confidence in a much weaker economic backdrop or a significant change in the outlook for AI capex,” according to strategists led by Dennis Debusschere, co-founder and chief market strategist at 22V.

US equity short sellers were down $80 billion in mark-to-market losses, or roughly 4.8% in the final week of November, wiping out the bulk of what had been nearly $95 billion in month-to-date profits prior to last week, per data compiled by S3 Partners LLC.

“Shorts were whipsawed in November, giving back almost all the profits they earned in the first three weeks of the month in the last week,” said Ihor Dusaniwsky, managing director of predictive analytics at the firm.

More recently, hedge funds covered their positions on US equity indexes and exchange-traded funds by the most in five months, according to data from Goldman Sachs Group Inc.’s prime brokerage.

While trading has become volatile after the strongest six-month rally since the 1950s, fundamentals continue to work against skeptics. Companies are forecast to grow profits by 12.5% over the next 12 months, data from Strategas Asset Management LLC show. And while consumer confidence has been flagging, data from Mastercard SpendingPulse showed spending on Black Friday rose 4.1% from a year earlier — a sign that the US consumer remains strong despite a softening labor market and worries about inflation.

The Federal Reserve is now expected to cut rates at its policy meeting next week, a move that should stoke economic activity. At 22V, a model tracked by the quant team flipped to an “everything rally.”

The S&P 500 fell 0.5% Monday after a torrid 3.7% run in the holiday-shortened week that salvaged a November gain. The dip buyers, retail and institutional investors alike, have emerged at virtually every drawdown since April no matter the macro backdrop.

“Shorting equities right now is exceptionally difficult because weakness continues to get reflexively bid,” said Dave Mazza, chief executive officer of Roundhill Investments. “November flipped from one of the worst in decades to a positive month, and that kind of violent reversal forces shorts to unwind.”

The peril was on display Monday when Beyond Meat Inc. soared nearly 37% on no discernible news. A stock that traded north of $190 in 2021 had fallen to $0.52 in mid-October. It rallied almost seven fold in three days after that before plunging anew.

“The cost of being positioned bearish rises quickly,” Mazza said of Beyond.

Traders are also entering a seasonally bullish period for equities. The S&P 500 has averaged a 1.4% gain in December and finished higher 73% of the time, the strongest positivity rate of any month, according to data from LPL Financial. The strength has typically arrived in the second half of the month, with upward momentum building around the 11th day of trading.