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Short interest on the 2 biggest U.S. equity ETFs have fallen to record lows (NYSEARCA:SPY)

JPMorgan’s global markets strategy team has observed a significant decrease in short interest on the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the Invesco QQQ Trust ETF (NASDAQ:QQQ), reaching record lows. They caution that a potential reversal in this trend could have an impact on U.S. stocks.

The SPY tracks the S&P 500 index, while the QQQ tracks the Nasdaq 100. Both ETFs are popular among investors, with the SPY being the oldest in the U.S. market and the QQQ launching in 1999.

According to JPMorgan, the decline in short interest on these ETFs has been a key factor supporting the U.S. stock market. Data from S3 Partners shows that the short interest as a percentage of float on the QQQ decreased from 16.61% in 2018 to 13.22% in 2023, while the SPY saw a decrease from 17.67% to 14.35% during the same period.

During this time frame, the QQQ has surged by 163.05% and the SPY has jumped by 78.11%. JPMorgan’s Nikolaos Panigirtzoglou notes that the declining short interest on these ETFs has provided steady support to U.S. equity indices as short positions were covered.

However, he also warns that the current low levels of short interest pose a vulnerability to U.S. equities in the event of negative news reversing the trend. The analyst estimates a quarter-end rebalancing flow of approximately $50 billion out of equities.

Overall, the declining short interest on major ETFs like the SPY and QQQ has played a significant role in supporting the U.S. stock market, but investors should be mindful of the potential risks associated with this trend.

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