One of the biggest drivers of the market’s recent rally appears to be short covering. In particular, a basket of heavily shorted stocks tracked by Goldman Sachs (GS) jumped by more than 13% this week, which beat the S&P 500 (SPY) by 9%. As stocks moved higher on hopes that tensions tied to the Iran conflict may ease, traders who had bet against the market were forced to buy back shares in order to limit losses. Because of this, the rally picked up speed as more bearish positions were unwound.
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Forget margin or options. Here's how the pros trade SPYIn fact, data from S3 Partners shows that investors have covered about $93 billion in short positions this month alone. Over the same period, major indexes like the S&P 500 and the Russell 3000 (IWV) have both gained more than 9%. On top of that, institutional investors and algorithm-driven funds are also stepping back into the market after previously reducing exposure. Nevertheless, this strength has not been evenly spread across the market, and some risks remain.
While riskier areas like microcaps and unprofitable tech stocks have surged, other parts of the market have lagged behind. For instance, an equal-weighted version of the S&P 500 (RSP) is still below its record high, and the Dow Jones Industrial Average (DIA) remains slightly under its peak. For that reason, some analysts warn that investors may be getting too optimistic too quickly. Still, upcoming earnings could support the rally, as profits are expected to grow by around 12% year-over-year, which may help justify the recent gains if results come in strong.
Is SPY Stock a Good Buy?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on SPY stock based on 411 Buys, 85 Holds, and seven Sells assigned in the past three months, as indicated by the graphic below. Furthermore, the average SPY price target of $825.53 per share implies 16.4% upside potential.
