‘Smart Money’ Still on the Sidelines

‘Smart Money’ Still on the Sidelines

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

FLASH: The ‘smart money’ is still refusing to chase the US stock market rally.

While US stocks kept moving North posting their best January in 30 years, hedge funds managers aka smart money, held their cautious stance, trimming Longs while boosting Bearish bets along the way.

At the start of February, their net exposure as measured by the Long/Short ratio stood near the lowest marks since at least last January, client data compiled by JPMorgan’s prime brokerage unit reveals.

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

In their minds, the Fed’s willingness to slow monetary tightening may not be enough to offset a myriad of hurdles facing the market, according to the global head of risk advisory at Credit Suisse.

The threat of BREXIT is hard to ignore and a deadline for the US and China to reach a deal without escalating the trade dispute come up on 1 March. Plus, 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 of Y 2018, and the majority of hedge funds resist the growing bid for risk in a climate of moderating growth and unresolved headwinds.

The inclination to cut exposure in the face of an equity rally has opened up a divergence similar to that seen last Summer.

At that time, the prevailing caution among hedge funds proved prescient as the S&P 500 peaked in September before correcting to edge of a Bear market.

Now, the reluctance to embrace stocks has been costly.

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

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

While machinery producers and equipment manufacturers have beaten all other sectors in the S&P 500 this year, hedge funds continued to trim their holdings. Their Long/Short ratio fell to the lowest since April 2017.

Another drag came from the conviction of their Bearish wagers. According to Goldman Sachs, Short sales by its clients outpaced buying by a ratio of 5-to-1 in January.

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

HeffX-LTN’s overall technical outlook for the major US stock market indexes is Neutral to Bullish in here.

Have a terrific week.

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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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