A Junky Rally

Stocks are continuing to rally from deeply oversold conditions. While the rebound is welcome, it’s worth taking look under the hood to see whats driving the recent performance. Here are the YTD returns for the six strongest stocks in the S&P 500 today:

FCX: -45%
JOY: -63%
CNX: -66%
WYNN: -52%
SNI: -28%
GNW: -36%

What is interesting about this list is that although these stocks have been pummeled in 2015, there are not too many shorts reaping the benefits. The short interest in all of these companies other than SNI is under 5%. With that said, the most heavily shorted stocks in the market are having quite a run.

Here are the returns for the first four trading days of the week:
Average of all S&P 500 stocks: +2.8%
Average of top 20 most heavily shorted S&P 500 stocks: +4.7%

Not only are they up almost twice as much as the average S&P 500 stock, but every single one of the top 20 most heavily shorted stocks is positive for the week. To be fair around eighty percent of the S&P 500 stocks are positive, so it’s not only the beaten down stocks that are rallying.

Here is the average short interest for each of the ten S&P 500 sectors.

Energy stocks are having quite the week. They are outperforming the S&P 500 to a degree not seen since the end of 2008.

The bounce in Energy is a tailwind to large cap value as it represents 14% of the index. The Russell 1000 value is having its second best week of the year.

It’s also worth pointing out that we might be seeing some capitulation in Emerging Markets. VWO and EEM, the two most widely traded Emerging Market ETFs, lost ten percent of their AUM last week (I am definitely not calling a bottom, nor will I reference this post if this is indeed the bottom).

It’s very nice to see that stocks are rallying, but a closer look at what is leading the charge paints a less rosy picture.