Hedge funds are skeptical of the big summer rally that broke out in the middle of the Bear market. According to the calculations of Greg Boutle, analyst at BNP Paribas, the Net short positions of hedge funds on S&P 500 futures hit a record $ 107 billion this week. Shorting S&P 500 futures is a common way of betting against the broader stock market, but it can also be part of a hedging strategy.
The bearish bets they built up as the S&P 500 rose for four consecutive weeks, bouncing more than 17% from the 52-week lows of June 16. Economic data indicating an easing of price pressure has reinforced the belief that the Federal Reserve is keeping inflation in check. “As powerful as the market rally has been, it is viewed with substantial skepticism,” said Nationwide’s Mark Hackett.
Given the massive defensive positioning, some hedge funds were forced to hedge their short bets as stocks continued to rise, further fueling the rally in the near term.
Many on Wall Street believe that signs of a spike in inflation data may not be a sufficient catalyst for the rally to have lasting strength.
On the other hand, there are those like Bank of America strategist Michael Hartnett reiterated his bearish stance, according to which the Fed has not finished raising rates yet, despite the stronger-than-expected rally in equities.
“Very few fear the Fed … yet the last time the Fed ended the hike cycle with negative real rates was 1954 and even assuming that CPI gains halve over the next 6 months, inflation will stand at 5 -6% next spring; whether the Fed knows it or not, it’s not done at all, ”Hartnett told clients in a statement.
Meanwhile, the market saw inflows of $ 7.9 billion in equities in the week ended August 17. Bonds saw moderate inflows, while cash outflows were $ 500 million. Two catalysts for market reversal according to Hartnett: oil above $ 100 and corporate bonds below key levels. “We are close to the top of the equity trading range, concludes Hartnett that final lows are yet to be seen.