Short Sellers Won Again With Bear-Market Rally Sputtering

The renewed selloff is a vindication for hedge funds that, according to Wall Street's major prime brokers, added to bearish wagers last week in the face of market gains. While prior bouts of rising bearishness like this have given way to short squeezes this year, this episode reflects growing angst ahead of next week's inflation reading and Fed's final policy decision of 2022.

While the S&P 500 is on track for just its second double-digit loss in 20 years, it's been a rewarding time for bears. Down more than 40%, the Goldman basket of most-shorted stocks is poised for its worst annual performance since data began in 2008, a loss that essentially amounts to profits for those wagering against these shares.

The Goldman's basket of most-shorted stocks dropped more than 3% for two days in a row.

From Morgan Stanley to JPMorgan, many Wall Street firms have seen their strategists calling for the S&P 500 to test its 2022 lows next year, citing everything from a looming earnings contraction to persistent Fed tightening.

The bleak sentiment got another boost from Goldman's financial-services conference Tuesday, where some Wall Street chiefs sounded alarms about consumer weakness.

It's "a bit of a perfect storm near term," said Dennis DeBusschere, founder of 22V Research. The "Fed looking at lagged data pushes up terminal rate at the same time companies are sounding worse and worse on growth outlook."