“They will buy shares in any scenario”: is a historic short in the markets a sign of a rally?

Traders at Goldman Sachs say that hedge funds have been cutting their holdings in stocks around the world for six consecutive weeks, mainly through heavy short sales (short sales that mean pricing down the price of a security) – Bloomberg reported. This is the third largest (net) sale of shares in the US in the last decade, close to the levels seen during the Corona crisis, but lower than those seen in the tariff saga in April 2025. “Signs of capitulation are beginning to appear,” Goldman Sachs wrote, implying that hedge funds are close to the maximum levels of pessimism about the market.

But why should estimates for a bear market be a sign of optimism? The meaning of the hedge funds’ big bet on declines in the markets due to the war is that when the security situation calms down, they will be forced to quickly increase their exposure to stocks.

To make short sales, hedge funds borrow the security they are trading against from the banks and sell it (usually at a price close to the market price). So, if the bet is successful, the price of the paper drops from what it was sold for, the hedge funds buy it back at a cheaper price, return the asset to the bank and profit from the difference.

However, if the bet goes wrong, and the price of the security rises instead of falling, the losses of the hedge funds keep piling up and can deepen to huge sums. In such a case, the funds must buy back the shares, before the losses accumulate. When a large amount of short positions are closed at once, it results in a sharp jump in the security, known as a “short squeeze”.

Goldman even wrote that systematic investors – that is, those who trade according to models and automatic algorithms – sold shares to the extent of 190 billion dollars in the last month, and are now in a short position of about 50 billion dollars on shares around the world. “The systematic community is losing steam,” they wrote there. “The asymmetry is upwards – during the next month we estimate that such investors will buy in any scenario.”

The bank even estimates that pension funds will also increase exposure to the stock market before their monthly balance, which will remove another pressure point from the market.

So does this mean that the stock market is near the bottom? The bank wrote that “it feels like we are closer to the end than the beginning”, but emphasized that no one can provide a clear timetable for the war. “While it’s fun to be the one to take credit for identifying the bottom, intellectual honesty suggests we’re not there yet.”