As long term investors it’s worth revisiting some of the key drivers of the market direction in the last two weeks. The bounce in the ASX 200 from its lows was effectivity caused by a surprise of the FED’s interest rate stance. This saw hedge funds begin “covering” their short positions in the Australian market, and especially in the ASX 20. As at 30 September, the total combined value of the 30 largest short positions on the Australian share market was $17 billion. These shares are borrowed from Australian and International funds. With the absence of any further bank capital raisings and the hit of a commodities rally, the Australian market moved up from 5,000 – 5,250 points in the best week’s performance in over 4 years. However this short covering was always going to fade, and the minor sell-off of the past few days is probably the start.
The Westpac announcement of a capital raising yesterday (the last of the Big 4) will also weigh on the market again. Continue to expect periods of excessive volatility that are not reflective of properly functioning capital markets. Investors of patient capital will continue to be challenged by the short term focus of speculators.
The activities of hedge funds is also seeing large single bets being placed on stocks. Woolworths continues to be the largest short position by value in the market, increasing week on week through September. The current situation reminds us of Cochlear in late 2014, when the stock was trading at $55, and nearly 20% of all the stock on Cochlear had been “short sold” by hedge funds. Needless to say, the hedge funds were proved wrong in the end.
Figure 1 – Cochlear short selling experience