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Short Sellers Vs. The 2023 stock market rally


As we come off to start a new year, traders and investors have been witnessing a small comeback in the stock market. After rallying down for several months while 2022 was coming to an end, 2023 began to differ. Many investors and traders implemented a bias towards the stock market, many thought we would still see continuation towards the downside since the Fed were still raising rates. Four weeks into 2023, the stock market has seen a 30-point reversal to the upside, making short sellers time very difficult.

Short sellers’ profit by borrowing shares of businesses they think are overpriced, selling them, and then repurchasing them at a cheaper price later. When global markets crashed in 2022, they saw significant profits. However, their luck changed in January when the stock market partially recovered its losses.

Investors and analysts claim that a few factors appear to be driving the rise. Investor bets that the Federal Reserve would switch from boosting interest rates to lowering them as soon as the second half of the year have increased in response to signs that inflation is slowing down. This has contributed to an increase in hazardous assets globally. Market segments that are particularly dangerous, including equities with strong short interest, have risen even further. According to analysts, this has probably compelled bearish short sellers to close out their positions in order to reduce their losses, resulting in what is known on Wall Street as a short squeeze.

On Wednesday, February 1, after the Fed wraps up its first two-day policy meeting of the year, investors will receive its next report. Compared to last year, the Fed is forecasted to hike interest rates by a quarter of a percentage point this year, 25 bps.

Some investors are expressing concern that a protracted increase in speculative assets will loosen financial conditions once more and hinder the Fed's efforts to combat inflation.

Written by: Massimo Scaccia


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