Unusual Action Warns That Institutions Are Reducing Exposure
There was an odd brew of strength and weakness on Monday.
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Only about 45% of stocks advanced on Monday, but strength in the most shorted AI names helped to offset stocks that were lower on higher oil and interest rates. It was an unusual mix of action, with some pockets of momentum in groups like AI-related software and some infrastructure names. The Magnificent Seven did not participate and was down over 1.2%. Small caps were also in the red while the Invesco QQQ Trust (QQQ) gained 0.6%.
Momentum Unwind
One explanation for what is happening comes from Goldman Sachs (GS). Goldman noted that its “momentum pair basket,” which is long the strongest names and short the weakest, is lower for a third straight session and down more than 6%.
The losses are mostly on the short side, where the laggards have squeezed higher for a fourth straight day, while the longs (like the Magnificent Seven) have done nothing to offset it. When the loss is mostly on the crowded short side, the likely reason is an unwind of positioning rather than a shift in leadership. My suspicion is that this is what is called “degrossing,” where big funds cut both longs and shorts to reduce overall exposure.
Institutions Are Reducing Risk
That is a rather long-winded way of saying that there are signs that institutions are working to reduce risk levels, which makes sense given the various catalysts on the horizon, including Iran, massive IPOs, rebalancing, seasonality and economic data.
Tough Action to Navigate
This is tough action to navigate, as the stocks that are working best tend to be the most extended and offer few entry points unless you are an aggressive chaser. Much of the market is not doing anything, and even the Magnificent Seven is acting poorly.
My Game Plan
My game plan remains roughly the same. I’m protecting gains, keeping accounts close to highs and staying selective with new buys. I am not finding a lot of places to put idle capital, so that is keeping my cash levels high and limiting my risk. I’ll be happy to buy if I can find some names that I feel can generate short-term momentum. There just aren’t many.
Have a good evening. I’ll see you tomorrow.
