Are Hedge Funds Predicting A Stock Market Crash?

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The U.S. economy has seen a decent economic rebound, and the stock market has surged on the back of this. Once again, retail traders are in the driving seat and are pushing stock indices higher. Hedge funds are very hesitant to chase this rally. Let’s dive in.  

Are Stocks Going Up Or Down?

The short answer is up. The U.S. stock market has shown some serious strength since Biden became president. However, for the last few days, we do not see much volume in the market, and this is something that traders are paying close attention to. Stocks moving higher on a lower volume is a warning sign for a stock market crash.  

Dow Jones And S&P 500 

The Dow Jones Industrial Average is up nearly 9% year-to-date (YTD). The S&P 500 stock index has advanced 9.08% YTD. The Nasdaq Composite index has surged 6.75% YTD. 

Stock Market Breadth 

The Dow Jones’ market breadth gained momentum yesterday. 94% of the Dow Jones stocks traded above their 200-day moving average. 

The S&P 500 stock breadth also showed strength yesterday. 95% of the shares traded above their 200-day moving average. 

What Is The U.S. Jobs Market Telling Us?

Traders are finding it difficult to make sense of the U.S. labor market, due to the conflicting signals there. The monthly jobs data, such as the non-farm payrolls, indicate that the jobs market is much stronger than expected. This month, the U.S. economy has created over 900K jobs. This means that economic recovery is on stable footing, and the U.S. economy is employing more Americans. However, if we look at the weekly jobless claims number, they indicate that more Americans have started to file for more unemployment claims. We now have two consecutive weeks of higher jobless claims, and this has started to bother traders.

Is The Stock Market Going To Crash? 

Hedge funds aren’t spending their chips on recovery stocks; they are more interested in investing their money on defensive stocks. By following this strategy, hedge funds have underperformed mainly due to retail traders who have been buying stocks that were beaten down during the pandemic. 

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Airlines, hotels, energy and bank stocks have seen their share prices surge enormously this year. Of course, support from fiscal and monetary policies has been the driving force behind this. It also appears that these policies aren’t likely to leave town any time soon, especially now that Joe Biden is pushing for his massive infrastructure package. 

Why Hedge Funds Believe In Market Meltdown 

Most of the hedge funds are concerned that the recovery in the stock market isn’t real, and when the stimulus support is withdrawn, we are likely to see the market rally petering out. Hedge funds, like companies, are resilient during an economic slowdown.

Hence, their exposure to cyclical stocks is at its lowest level relative to defensive shares in almost ten years —meaning they have more defensive stocks in their portfolios. 

In addition to this, we also have some professional speculators who are hesitant to chase the initial recovery as they think that the fear of another lockdown isn’t over yet and Covid-mutation remains a threat. 

Bottom Line

In all of this pessimism, one should not forget that if hedge funds do join this rotation rally, we are likely to see the U.S. stock market skyrocket. But the absence of their participation leaves the door open for a significant correction or a stock market crash.