June 07, 2023
Weekly Market Outlook
By Donn Goodman and Keith Schneider
According to the latest CFTC data, hedge funds are holding their highest level of short positions in the S&P 500 ever. Additionally, over $5 trillion is sitting on the sidelines in money market funds and short-term securities.
Why would investors continue to hold so much cash and hedge funds be so bearish (see chart below) when the Federal Reserve officials are suggesting it’s time to pause their campaign of rate hikes?
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While we don’t know exactly what the bearish hedge fund traders are thinking, we do know that there is a lot of bearish sentiment focused on these two themes.
The first theme is the economy. Many indicators suggest that a recession is near, and stocks tend to decline before recessions begin.
For example, two economic indicators that we have not focused on recently are:
- The Leading Economic Indicators data is a level that has consistently preceded recessions – see chart here.
- The recent Univ. of Michigan Consumer Sentiment data has fallen to levels not seen since the Debt Ceiling crisis in 2011 and the Great Financial Crisis in 2008-09 – see chart here.
These are only two of many economic indicators that suggest a recession may occur in the foreseeable future. We cover several more economic trends every week here.
However, bullish investors have some economic data on their side too.
A second theme that bearish investors point to as a reason to expect the stock market to fall is a technical condition that has historically preceded big market declines. However, this condition is also why the market has performed so well in 2023.
While there is a lot of attention on this popular technical condition in the media, we suggest you look at our weekly summary of “Risk On” and “Risk Off” technical conditions at the bottom of every week’s Market Outlook.
This week, over 15 “Risk On” conditions are highlighted versus 2 “Risk Off” highlights.