Too Many Faders, Not Enough Fade

The S&P 500 limped through a new all-time closing high above 1900 this week, snapping a two-week sell-off streak and perplexing anyone who owns stocks and not indices – the participation is pathetic at best, very few NYSE stocks are printing new all-time highs along with the averages.

But, as David Tepper says. it is what it is.

FactSet thinks the market may be getting some help from the fact that short-term sentiment seems to have taken a nosedive and all kinds of big investors are out of step with the action:

This week brought more discussion about how some combination of investor angst and positioning pain may be facilitating the grind higher. CNBC noted that an increasing number of higher-profile investors, strategists and technicians are calling for market pullbacks ranging from 10% to as steep as 25%. However, it also pointed out that the correction anticipation trade is getting so crowded that it is causing some to doubt that it will come. Goldman Sachs also highlighted the struggles in the hedge fund space this week, noting that its basket of the most popular hedge fund long positions has returned just 1.4% year-to-date, lagging the S&P 500 by 100 bp. It added that at the same time, its basket of very important short positions has returned 4.2%. In addition, it pointed out that performance headwinds from stock-picking were exacerbated by poor market timing as hedge funds cut exposure in early April, just before the S&P 500 and most popular positions began to rebound.

Josh here – I agree that this phenomenon is likely behind the recent action. I disagree with anyone who believes this is a good reason to be bullish short-term. This kind of thing tends to be self-correcting and rarely results in a positive outcome on its own. If you want to tell me the economic data is about to accelerate or S&P earnings estimates are due for a slew of revisions higher – that I can get behind. But can you tell me that?


FactSet Insight – May 23, 2014



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