JPMorgan Sees Room for Short-Covering to ‘Propel’ Risky Assets

(Bloomberg) -- Investors rushing to close their bearish bets may drive the next rally in stocks and junk bonds, according to JPMorgan Chase & Co.

The $252 billion SPDR S&P 500 ETF Trust, ticker SPY, remains “firmly in oversold territory” despite posting a record monthly surge in April, JPMorgan strategists wrote in a note last week. Meanwhile, though investors have unwound short positions against high-grade bonds, bearish bets are still elevated for high-yield ETFs such as BlackRock's $20 billion iShares iBoxx High Yield Corporate Bond ETF, ticker HYG, they wrote.

“We still find room for further short-covering,” strategists led by Nikolaos Panigirtzoglou wrote. “There is enough short base to propel risky markets further from here, in particular equities and HY credit.”

Short interest as a percentage of shares outstanding on SPY -- a rough indicator of bearish bets on the fund -- is currently 6.4%, according to data from IHS Markit Ltd. Short-interest reached a near-record of 7.4% on March 3.

SPY surged a record 12.7% in April, after declining 13% in March as the coronavirus outbreak rattled markets. Despite April's advance, SPY is still down more than 12% year-to-date. The ETF fell 0.4% at 12:33 p.m. in New York Monday as the U.S. escalated trade rhetoric against China.

Investors are also wary on junk-rated corporate bonds despite the Federal Reserve's pledge to backstop credit markets, the analysts said. Short interest as a percentage of shares outstanding on HYG is a still-elevated 19.7%, after hitting a record 39% in late February, IHS Markit data shows.

“The short base on HY ETFs remains elevated despite the past week's decline, suggesting that credit investors remain more cautious on the lower rated sectors,” they wrote.