Managed Money Still Sidelined Missing the Best January in 30 Years

Managed Money Still Sidelined Missing the Best January in 30 Years

$DIA, $SPY, $QQQ, $RUTX, $VXX

FLASH: San Francisco Fed President Mary Daly said Friday afternoon that the central bank is debating whether QE (quantitative easing) should be reserved for emergencies or used more readily. Market turned; S&P 500 NAS Comp and RUTX finished in the Green, DJIA off a bit.

The S&P 500 utilities sector (+0.5%) was a consistent leader throughout the day.

Comeback performances from the consumer staples (+0.5%), information technology (+0.5%), and communication services (+0.4%) sectors helped underpinned the advance.

The cyclical energy (-0.7%), financial (-0.6%), and consumer discretionary (-0.5%) sectors under-performed.

Managed money still refuses to chase the equity rally.

While US stocks kept driving North, posting their best January in 30 years hedge funds held the caution mode, trimming Longs while adding Bearish bets along the way.

At the start of this month, their net exposure as measured by the Long/Short ratio stood near the lowest mark since at least last January.

The defensive posture highlights the unease, despite an equity rebound from Q-4’s sell-off.

In their minds, the Federal Reserve’s willingness to slow monetary tightening may not be enough to offset a myriad of hurdles facing the market, that may have changed today with the Fed’s statement on QE use.

BREXIT and the US-China trade dispute is in the headlights, as deadlines loom

All the while corporate America is heading for a Quarter of negative profit growth for the 1st time in 3 years.

“Hedge funds do not heed the call of dovish central banks; instead remain sensitive to global macro and political risks that roiled markets in Q-4. The majority of hedge funds resist the growing bid for risk in a climate of moderating growth and unresolved headwinds,” JPM sent in a note to clients Friday.

The inclination to cut exposure in the face of an equity rally has opened up a divergence similar to last Summer’s. Then, the caution among hedge funds proved prescient as the S&P 500 peaked in September before correcting to the brink of a Bear Market.

Now, the reluctance to embrace stocks has been costly to the smart money.

Up 5.5% in January, industry’s returns is really goo. But in a month when the S&P 500 gained 8%, their sub-par performance marked the industry’s 2nd-worst start of a year since Y 1997.

Goldman Sachs’s prime brokerage unit highlighted a big miss in industrial stocks.

Machinery producers and equipment manufacturers have beaten all other sectors in the S&P 500 this year, as hedge funds continued to trim their holdings. Their Long/Short ratio fell to the lowest since April 2017. There is an age old market adage, “watch the machinery and equipment makers for direction.” If that indicator is right this time, look for a Squeeze to set the pace soon.

According to Goldman Sachs, Short sales by its clients outpaced buying by a ratio of 5-to-1 in January.

That does not auger well for performance in a market when shares are up. In fact, a basket of most-Shorted stocks tracked by Goldman Sachs jumped nearly 13% in January, effectively the worst month for Bears since Y 2010.

Friday the major US stock market indexes finished at: DJIA -63.20 at 25106.33, NAS Comp +9.85 at 7298.21, S&P 500 +1.83 at 2707.84

Volume: Trade on the NYSE came is at 833-M/shares exchanged

  • Russell 2000 +11.7% YTD
  • NAS Comp +10.0% YTD
  • S&P 500 +8.0% YTD
  • DJIA +7.6% YTD

HeffX-LTN’s overall technical outlook for the major US stock market indexes is Neutral to Bullish across the board for the week ended 8 February 2019.

Have a terrific weekend.

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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