Hedge Fund Selling Accelerates, According to Citi

Long-only managers increased their investment exposure over the past week, particularly in the technology, industrials, and financial sectors, according to a report from Citi. In contrast, they reduced their investments in energy, healthcare, and real estate.

Citi’s strategists noted that energy has experienced outflows from long-only managers over the last two months, while financials, technology, and consumer discretionary sectors have seen the most significant inflows.

In the realm of hedge funds, selling activity dominated for the week, with only a few sectors experiencing net inflows. Hedge funds upped their exposure to financials, healthcare, and energy, while the largest net outflows were observed in consumer staples, technology, and industrials.

Citi also pointed out notable shifts in its flow-based relative value model, with technology replacing real estate among the top three sectors. Utilities and materials now occupy the bottom three positions, supplanting technology and communications.

According to Citi’s strategists, recent market internals indicate a departure from “Soft Landing” sector positioning, with current price movements suggesting a mix of “early recession,” where energy and technology have underperformed, and “late recession,” where cyclical stocks have outperformed defensive ones.

Strategists mention that the correlation with “Soft Landing” has decreased, while the correlation with “Overheat” has increased. They warn that historically, when the ‘Overheat’ correlation turns positive, it often indicates challenges for the S&P 500, making it an important thing for investors to monitor.

On a positive note, the S&P 500 and the Dow Jones Industrial Average reached record highs on Tuesday, despite disappointing consumer confidence data, driven by a surge in mining stocks following China’s announcement of a substantial stimulus package. The Dow increased by 0.20%, the S&P 500 rose by 0.25%, and the Nasdaq Composite climbed by 0.56%.