Is the bull market over after the sale of hedge funds?

The big sellers in December were hedge funds, which, chastised by reverse bets on top-flight software companies, spent the month cutting back on high-momentum trades. This helped make it one of the most volatile year-endings for large-cap tech over the past decade, with the absolute size of closing moves in the Nasdaq 100 reaching around 1.4%.

As a three-day rally restored order to the now 26% higher S&P 500 in 2021, doubts remain about omicron’s path and how central banks will tackle inflation. The rebound that took the index to an all-time high followed a period of liquidity building up and retail investors, the die-hards who once flocked to bullish options for quick profits, worried about the decline.

“With risk having been significantly reduced and investors now looking beyond omicron, there is now a lack of an offer to sell as the momentum has changed,” said Eric Johnston, head of equity derivatives and investments. multi-active products at Cantor Fitzgerald. the rally is likely to be short.

“The bull market as we knew it, I think, is over,” said Johnston. “The system’s liquidity drain and the Fed’s tighter overall policy will be a headwind for risk taking.”

Surprisingly strong earnings and optimism about the economy have propelled the S&P 500 to nearly 70 all-time highs this year, on course for the second-best annual record of all time. Signs that omicron may not be as deadly as other strains of the virus have clashed with continued news of business closures and global travel restrictions threatening growth.

A newly hawkish Federal Reserve also adds to the lack of conviction that characterized December. The S&P 500 has alternated gains and losses each week, each with moves exceeding 1%.

For those who have watched the S&P 500 double in 20 months and are worried about bubble valuations, rising skepticism may be a welcome development, putting the market on a healthy footing. For opponents, all the caution suggests that the skeptics may have been swept aside and that a bit of good news could spark market gains. JPMorgan Chase & Co. thinks so. Strategists led by Marko Kolanovic have predicted a strong recovery in the new year, as positions reverse the bears.

Avoiding risk now could be a mistake, says Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management.

“It’s too early to turn bearish, to think the market is down because corporate fundamentals are going to continue to be strong,” Slimmon said in an interview with Kailey Leinz on Bloomberg TV. “There will be opportunities to take advantage of what the market offers, but you have to be prepared to go against the grain, and that means taking more risk here today.”

Despite this week’s rebound, the risk-taking spirit has taken repeated chunks of late. While the S&P 500 managed to post all-time highs in December, the pain below the surface is brutal. In recent weeks, the Russell 2000 small cap has fallen into a 10% correction, newly created stocks have slumped into a 20% bearish drop, and a group of profitless tech companies have plunged nearly 30 %.

The carnage in the riskiest corners dealt a particularly heavy blow to hedge funds which had crammed into high-growth, high-valuation stocks, causing a swift unwinding. In recent weeks, their net exposure to expensive tech stocks and those that have yet to make any money has fallen by around 4 percentage points to around 14%, the lowest level since mid-2020. , according to data compiled by senior broker Morgan Stanley.

The feeling of risk aversion was echoed by the latest Bank of America Corp. survey. In this poll, global fund managers this month increased their liquidity to the highest level since May 2020 while reducing their exposure to equities to a 13-month low.

Among amateur investors, the once-wild gambling spirit is fading. Tracking data on small lot options trading, a proxy for retail activity, Susquehanna International Group found that its stake was declining on the call options side while increasing on the options side. sale.

Certainly, the belief persists. A week ago, when the S&P 500 fell every day but one, investors put $ 30 billion in exchange-traded funds with a focus on U.S. stocks, the largest inflow since March.

A closer look at stock performance revealed a clear preference for safety. Companies with stable incomes and dividends, such as utilities, health care and consumer staples, topped the December rankings, each increasing about 7% as a group.

“Investor confidence is somewhat limited,” said Nicholas Colas, co-founder of DataTrek Research. His company just conducted a survey of the market outlook for 2022 and found that the majority believed the S&P 500 would be up less than 10%. No wonder December is proving difficult, because if an investor thinks next year’s gains will be limited, then selling before an average year is a solid strategy. “

This story was posted from an agency feed with no text editing. Only the title has been changed.

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