After the underperformance in the first half of the year, what do you do if you are a hedge fund manager? How do you explain getting 2 and 20 when you get clobbered by the S&P? The buying you saw last week was desperation. You only get those kinds of moves in a couple of situations. When you are coming off a panic bottom or when you have underinvested fund managers who need to chase and add beta, and add it fast. I would have to say that it is the 2nd case.
Moreover, this underperformance is revealing a two-tiered environment. A small group of hedge funds that really add value and consistently outperform and the majority of funds that lack talent and have gotten by on sheer luck/ rising markets.
Over the long weekend, the underperforming funds decided to throw caution to the wind and buy up commodities in a hail mary bet that they can come back from a bad year with aggressive beta plays. I think that explains the sudden strength on Tuesday in precious metals, oil, and grains with a flat S&P. And the recent outperformance in high flyers like NFLX, LULU, etc. For the remainder of the year, the chase is on for performance and it will lead to ridiculous overshoots on the upside. Followed by panic selling on the downside. We are right in the middle of the overshoot to the upside.
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20 comments:
It's probably partially true, but this quote from http://www.reuters.com/article/2011/07/07/markets-europe-stocks-idUSL6E7I70DP20110707 would suggest otherwise. "A study of client flows by UBS suggested long-only investors have turned steady buyers of European equities for the first time since February, although hedge funds have been net sellers over the past month.".
I don't think we are involved in an "upshoot". This is a market that is in denial about the real fundamentals. We have had steady mutual fund outflows over the past three years and mutual fund cash levels are pretty low. I don't think there are too many underinvested managers out there. You have to remember prices don't necessarily rise because there are buyers pushing it up. It could just be sellers realizing this is not a great level to sell at and cancelling their orders. I think that is what is happening.
I would say smart money that bought at S&P 666 upwards would sell it now to panicking fund managers. you always need volume to sell a big position.
We had astronomical put buying in June. Who were buying those puts in such large volumes? Definitely not the retail guy. Retail guy doesn't hedge long positions with puts. They just buy and sell stocks. My guess is that hedge funds were long heading into June after getting mauled in May in the hi beta commodity dump and loaded up on puts to protect themselves because of seasonal weakness. They finished hedging the week prior to the low (hedge funds are the new mutual funds and hence, the dumb money) and then found themselves unwinding their hedges like raving lunatics. Hedge funds unwinding long puts in record volume pushes equities to one of longest squeezes in history. I doubt hedge funds are buying here. They are just getting squeezed on their hedges.
.... as they watch the market rocket to the moon while they have been generally market neutral.
Also 4 of the biggest squeeze days happened in the last week of June. If they were chasing performance, their June #'s wouldn't have been negative. Hedgies nervous about being net long probably means we will continue rally after a pullback.
so, will the gap close?
no pain no gain.
Hedge funds are stuck net long now and will re-hedge lol.
This looks like a fabulous buying opportunity. I would be a buyer at the open. We may go down a few points afterwards but it won't last for long. As I said, this weak jobs number is a blessing in disguise. It brings QE3 back into the picture along with a weaker dollar.
Question:
Everyone knows this market moves on emotion.
Take Greece. I don't think anyone really thought they would default this time around. Yet the market still dropped 10%.
Not raising the debt ceiling is 10x more important to the US than Greece defaulting, yet again, even though we know it will be raised the fear aspect of it not, is NOT playing out in the markets?
Why?
Markets tho not completely zero sum, approach zero sum and move on open interest of the herd. Greece fears happened near the 52 week high where the mass were positioned long. If we are at new highs by the time the debt ceiling debate begins, you will see big falls the week before. Market ALWAYS create drama even in the most certain scenarios.
This month is a carbon copy of April.
The markets will be lower next week, followed by a mighty relief rally. New debt ceiling agreement and better than expected earnings.
Yes, it is looking like April. Earnings should be ok with the Japan excuses lined up by the CEOs for the softer numbers in Q2. The debt ceiling is a distraction, it is a non-issue because they will get it done. Unlike Greece, the debt ceiling has been raised in all past cases. 100%. How can you be more certain than that?
100%
It's also 100% true that the US is a catastrophic Ponzi scheme hurtling towards collapse.
Which may have an impact on business.
That said, I have no idea what will happen to the stock market. It looks like buying dips will work until it doesn't. But when it doesn't...look out below. I still vividly recall the vicious selling in 2008/early 2009.
Owl, trust me.. markets and media find a way to bring fear and uncertainty even in 100% situations. Amazing markets still fall whenever a european pig threatens default.
Yes, a Ponzi scheme but backed by infinite dollars from an easy Fed. Remember that the stock market has been supported by not only QE2, but a load of corporate share buybacks.
We are entering the part of the bull cycle called the Oink oink Greedy Swine period where things just go up like nonsense and greedy housewives and dumb hedge funds just bid up stuff cos they've had nowhere else to put their money past 4 years in a 0% interest environment and dead real estate market. When the s&p rises 50-80% the next 12 months, Obama and Bernanke will look heroes. Media will proclaim ultimate victory over the evil recession and their faces will be plastered on the cover of Time magazine and Newsweek. Too bad that moment will be the end of the longer term American bull.
As long as I'm one of the ones going "oink oink" I don't giva a dam!
Everyone and their brothers, sisters, neighbors will be daytraders in 12 months. Mark my words. And the buzzword at all cocktail parties will be silver & gold...
Yes, we are no where near a top in the stock market. You get tops when retail is optimistic about the market, not when they fear another 2008 scenario. Next year could be it, or it could be 2013. Watch retail traders and how they act.
Right now, this bull still has a lot of life left in it.
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