Individual investors bought a net $78 billion in stocks and ETFs in the first quarter. As reported in the Wall Street Journal, data from Vanda Research point to the third-largest quarter of purchases in history. The prior two were the first quarter of 2021 and 2022. In both quarters, individual investors bought about $80 billion. Before the pandemic, the average quarterly net sum of individual purchases only averaged around $15 billion.
While individual investors appear bullish, hedge funds are digging into their bunkers. As we share below, hedge funds are now at their largest short position since 2011. The market rallied for five months from that low, forcing many hedge funds to cover their shorts. The current divergence of opinion will resolve itself, but historically, looking at the positioning of individuals or hedge funds has not proven to be an accurate predictor.
What To Watch Today
Economy
Earnings
Market Trading Update
Another day of weak market action is putting additional pressure on the MACD buy signals, which are now close to triggering. If the markets trade weakly tomorrow, the signals will trigger. Currently, the market is holding support just above the early April high after breaking above the downtrend line from last year. Despite the bearish rhetoric as of late, the market continues to trade very bullishly. However, this week will be the test as the largest market cap companies report earnings. While they will likely beat estimates, their outlook will maintain or reverse recent bullish price action.
We suggest remaining cautious until the market declares its next directional move by either breaking above last week’s high or breaking below the recent support line.
Hedge Funds Hate Treasuries and Stocks
As we led this Commentary, hedge funds are now the shortest stocks than at any time in the last ten-plus years. It’s not only stocks they think will perform poorly.
The graph below from Bloomberg shows that hedge funds, in the aggregate, are not buying into the recent trend of lower yields. Given their extreme bearishness, they are betting yields will rise back to the highs of 2022. Per Bloomberg:
“Hedge funds may be thinking that inflation will be stickier than many in the market are currently expecting,” said Damien McColough, head of fixed-income research at Westpac in Sydney.”
What does that mean for the future direction of yields? The graph highlights in yellow the prior peak and trough. The 2019 record short was 1.5 years and about 1.50% too early. The previous high bullish positioning was equally poor.
Earnings Estimates Stabilizing
The graph below, courtesy 3Fourteen Research, shows that 2023 annual earnings estimates have continually declined since the market bottomed last October. Not surprisingly, mega-cap stocks appear to be leveling off. Many of these companies are less vulnerable to slowing economic activity than smaller companies. Mid-cap stocks are also showing signs of stabilizing. Earnings estimates for small-cap stocks have been off 17% since October. Higher interest rates will likely have a much more significant effect on small companies. Since October, IWM, the Russell 2000 small-cap ETF is only up two percent, while MGK, representing mega-cap stocks , is up about 12%.
Bye-Bye, Bed Bath & Beyond – BBBY
Bed Bath & Beyond (BBBY), after being on the financial ropes for a few years, finally filed for bankruptcy this past weekend. The stock closed on Friday at 28 cents, so the news is unsurprising. From an economic perspective, there are jobs and store leases at stake. BBBY currently operates 360 Bed Bath & Beyond stores and 120 BuyBuy Baby stores.
BBBY was a meme favorite at times over the last year. The chart below shows that it rose nearly 800% from its pandemic lows. The various spikes in the stock represent very short periods where the stock surged along with other meme stocks. While those rallies were breathtaking, they were always reversed quickly.
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