Pimco Reloads Stock Shorts, Says Tech Is ‘Canary in Coal Mine’

(Bloomberg) — Pacific Investment Management Co. raised bearish stock wagers as the market bounced back, according to portfolio manager Erin Browne, who warns that the latest earnings woes from tech giants are a sign of what’s coming next for Wall Street.

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“Over the last week or so, we’ve been resetting shorts at higher levels, taking that as an opportunity to get more underweight stocks,” Browne told Bloomberg TV. “I don’t think yet that we have received the all-clear signal,” she added. “What I think tech is highlighting now is they’re the canary in the coal mine for the broad market.”

Stocks have recovered after hitting their bear-market low earlier this month as speculation grew that the Federal Reserve will slow its aggressive monetary tightening amid a weakening economy. Despite disappointing results from Microsoft Corp. and Google parent Alphabet Inc., the S&P 500 erased earlier losses, rising 0.6% as of 11:50 a.m. in New York. The index has climbed about 8% this month.

Browne isn’t alone in her skepticism. Hedge funds tracked by JPMorgan Chase & Co., for instance, also sold stocks during last week’s bounce.

Read: Hedge Funds Are Slashing Leverage to Weather Market Slump

A defensive stance has paid off all year. The current rebound represents the market’s seventh attempt to mount a comeback in 2022, with all previous ones eventually succumbing to fresh selling.

Yet at times, the persistent pessimism set the stage for a rally as bears were forced to buy back shares to limit losses, a move that added fuel to the upside for big benchmarks. That dynamic appears to be on display on Wednesday, with a basket of most-shorted companies jumping as much as 5%.

Optimism founded on the idea the Fed will prove less aggressive in its inflation-targeting campaign is premature, per Browne.

“I would fade the relief rally,” she said. “We need to see more widespread earnings degradation and downgrades to consensus estimates for next year as well as a resetting lower of margin exceptions,” she added. “Then we can see some price discovery and a bottoming out in the market. We’re still a ways from that now.”

–With assistance from Guy Johnson.