Momentum Begets Momentum (barring a major economic downturn)

We analyzed the daily dispersion between the Goldman Sachs Most Shorted Index and the Russell 1000 Growth in search of periods where heavily shorted stocks rallied versus market leadership.

July 11th’s rally was marked the 16th largest dispersion between the Goldman Sachs Most Shorted Index and the Russell 1000 Growth. Looking at the other top 15 days we make the follow observations:

• Large dispersion days tend to happen in clusters of two to three within a 30-day window, suggesting that we will see another large dispersion day soon.

• The results can be categorized broadly into periods in, or around, a recession and those where there was not a recession in sight. In the 9 cases out of 15 where there was no recession in sight, the average return of the S&P500 Index 60-days after the dispersion day was 8.9%. Suggesting, if the economy is not in or headed into a recession soon, dispersion days may be an indicator of market strength. 

Past performance is not a guarantee of future results.