Rivian (Nasdaq: RIVN ) leads a pack of heavily shorted stocks, which rose on Friday

Friday could be the day the market’s “high interest rate era” comes to an end. Jerome Powell delivered the speech at the Fed’s annual retreat in Jackson Hole and said “the time has come for policy to adjust.”

The comments boosted the stock market overall, but some segments of the market fared better than others. For example, while the S&P 500 rose 1.15% on Friday, the small-cap Russell 2000 rose 3.19%. Perhaps the biggest pocket of “winners” from Jerome Powell’s announcement were heavily shorted stocks.

Summary

• Heavily shorted stocks were the biggest gainers in the market on Friday.
• As the Federal Reserve signals that interest rates are coming down, areas of the market to watch include small-cap stocks, electric vehicle stocks and housing stocks.
• If you’re looking for some of the biggest stocks in the market that could see big gains as interest rates fall over the next year, be sure to grab a free copy of our “The Next NVIDIA” report.. A software stock featured in the report, which we believe has 10x potential, has risen 20% in the past month and could attract more attention as interest rates fall.

Heavily shorted stocks lead the market higher on Friday

Looking down Friday’s list of the best-performing stocks in the broader tech space, a common theme is very high short interest. Here’s a selection of some of Friday’s biggest winners.

Not all stocks that posted big gains on Friday are shorted heavily. For example, Working day (Nasdaq: WDAY ) rose 12.5% ​​despite few of its shares being short-sold. However, the company was growing much more due to the outstanding earnings it issued than macroeconomic events such as changing interest rate expectations.

Why Rivian and Other Shorted Stocks Soared

There are a few key categories to watch as the Federal Reserve begins to cut interest rates.

Low capital stocks: On days when the market rallied this summer on interest rate news, small caps outperformed large-cap stocks. A key reason for this is that small caps have underperformed recently, and the expectation is that lower rates could lead to more consumer spending and cheaper debt financing, which will disproportionately benefit equities with small capitalization. An important area to watch in the coming weeks is whether the rally in small-cap indexes such as the Russell 2000 continues.

After optimism over interest rate cuts built on July 10, the Russell 2000 continued to rise 11.5% in just four trading days. However, these gains evaporated in early August. The Russell 2000 is now back near recent highs and could continue to rise as the market is now pricing in more than 2% of interest rate cuts through the end of 2025.

EV stocks: Both EV and renewable energy stocks have two things in common: 1.) They are generally shorted and 2.) they require incredible amounts of capital that will become cheaper as interest rates rise. This combination of lower interest rates being a business driver and companies holding strong short interest has caused these stocks to skyrocket whenever the market begins to price in further interest rate cuts.

Beyond Rivian and Lucid, a number of heavily shorted stocks in the EV and renewable energy space posted big gains on Friday. EVgo (Nasdaq: EVGO ) has 28% of its shares sold short and is up 12.7%. Ahh Test systems (Nasdaq: AEHR) has 21% of its shares sold short and gained 8.4% on Friday.

Housing stocks: Another category that posted big gains on Friday is housing stocks. Beyond Redfin, stocks like OpenDoor (Nasdaq: OPEN ) posted big gains on Friday. OpenDoor has 13% short interest and gained 11.6% on Friday.

Data from Zillow had interest rates reaching over 7.6% last year. As of Saturday, the national 30-year fixed mortgage rate fell to 5.93%. Lower interest rates, along with policy proposals from Democratic presidential candidate Kamala Harris, could lead to a boom in new residential construction. This would be a big boon for software companies like Zillow and Redfin, along with homebuilders and other companies that are suppliers to the real estate industry.

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