Hedge Fund Selling Accelerates, According to Citi

Long-only managers increased their investment exposure in the past week, primarily in technology, industrials, and financials, according to a report from Citi. Conversely, investments in energy, health care, and real estate were reduced.

Citi strategists noted that energy is the only sector that has experienced outflows from long-only managers over the past two months, while financials, technology, and consumer discretionary sectors have attracted the most inflows.

On the other hand, hedge fund flows leaned toward selling during the week. Only a few sectors, including financials, health care, and energy, saw net inflows, while consumer staples, technology, and industrials faced the most significant net outflows.

Citi also pointed out updates to its flow-based relative value model, which now lists technology in the top three sectors, replacing real estate. Utilities and materials have moved to the bottom three, displacing technology and communications.

According to Citi’s strategists, the current market internals indicate a shift away from “Soft Landing” sector positioning, with recent price movements reflecting characteristics of both “early recession,” where energy and technology are underperforming, and “recession late,” where cyclical sectors are outpacing defensive stocks.

Strategists have observed a decrease in the correlation associated with a “Soft Landing” scenario and an increase in correlations linked to an “Overheat” scenario. They warn that in prior years, a positive shift in the ‘Overheat’ correlation has often preceded difficulties for the S&P 500, signaling a point of caution for investors.

The S&P 500 and the Dow Jones Industrial Average reached record highs on Tuesday, defying weak consumer confidence data, with mining stocks rising sharply following China’s announcement of a significant stimulus package.

The Dow rose by 0.20%, the S&P 500 climbed 0.25%, and the Nasdaq Composite increased by 0.56%.