Ark Picks Advance While JPMorgan Predicts ‘Short Squeeze Rally’

(Bloomberg) — Tesla Inc. and online health-care company Teladoc Inc. defied a market slump to rally on Friday, helping give a brief respite to Cathie Wood’s battered funds.

Nine of the top 10 holdings in Wood’s flagship fund, including Tesla, Teladoc and Zoom Video Communications Inc. climbed on Friday, driving the ARK Innovation ETF or ARKK up 5.7%. The fund is still down more than 20% this year with only Tesla and Intellia Therapeutics Inc. among those 10 that are on track to end 2021 higher.

It’s been a bitter year, pitting retail traders against short-selling hedge funds with losses on both sides. While many day-trading favorites have fallen below their former highs and shorts are once again amassing bearish bets, a JPMorgan strategist Marko Kolanovic pointed to day traders’ resilience and said he expects a year-end rally to be driven by the stocks targeted by short sellers.

His forecast felt particularly prescient on an otherwise downbeat trading day Friday as the funds run by Wood, a market guru for the masses who has made big bets in the future of some unprofitable companies, advanced.

Bearish institutional investors have Tesla, ARKK’s No. 1 holding, in their targets with one of the markets most eye-popping short positions. The electric vehicle-maker has more than $25 billion in shares sold short, according to S3 Partners. Bets against Teladoc are over $2 billion and almost all the top holdings in the ARKK fund have sizeable short positions in the $1 billion range.

“For short-selling campaigns to succeed, there have to be positioning, liquidity and often systematic amplifiers of the selloff,” Kolanovic wrote. “We believe these conditions are not met, and hence this market episode may end up in a short squeeze and cyclical rally into year-end and January.”