ORLANDO, Fla., April 23 (Reuters) – Still unconvinced by Wall Street’s recovery from March’s bank shock, hedge funds have instead made their biggest bet in over a decade that the S&P 500 (.SPX) will fall .
Commodity Futures Trading Commission (CFTC) data for the week ended Tuesday, April 18 shows that funds and speculative accounts increased their net short position in S&P 500 index futures by 36,645 contracts to just over 680,000 contracts .
This is the largest net short position since October 2011 and marks the fourth of five weeks that funds have increased bets on weaker US stocks.
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Essentially, a short position is a bet that the price of an asset will fall, and a long position is a bet that it will rise. Hedge funds take positions in futures markets for hedging purposes, so CFTC data does not always reflect purely directional bets. But it’s a pretty good guide.
The latest doubling by hedge funds comes as the US first-quarter earnings season gets underway. It was a mixed bag as nearly a fifth of S&P 500 companies reported.
About 76% had profit overruns and 65% had sales overruns, but estimates were low to begin with.
Additionally, according to Refinitiv’s IBES data, the consensus forecast still calls for a 4.7% decline in first-quarter earnings, which would confirm an “earnings recession” of two consecutive quarters of earnings declines.
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Earnings are likely to set market sentiment and direction for the week ahead, with “mega-tech” companies such as Alphabet (GOOGL.O) and Microsoft (MSFT.O) and Amazon (AMZN.O) set to report results.
To some extent, the funds’ bearish outlook is justified. Economic data has been mixed – Citi’s US Economic Surprise Index slipped to a 2-month low last week – uncertainty lingers over bank stress and concerns over the debt ceiling simmer.
Goldman Sachs’ equity strategy team, led by David Kostin, expects the S&P 500 to end the year at 4,000 points, down about 3% slightly from current levels.
But the market refuses to buckle. The S&P 500 has rallied nearly 10% off the March bank shock lows and if the options market is any guide, traders are optimistic about the near-term outlook.
The VIX index of implied volatility — Wall Street’s “fear index” — hit its lowest level since November 2021 last week. It’s also below the long-term all-time average since the index’s inception in 1990, at around 16.7.
There are plausible explanations for this resilience.
The latest Bank of America fund manager survey found the US equity allocation to be a 34% net underweight in April, up from March but still one of the most declining positions in 20 years and 1.5 standard deviation below its long-term average.
Hedge funds are also the bleakest in years. Perhaps the bearish positioning is just overkill.
Diane Jaffee, senior portfolio manager at TCW, believes so. While stocks have become less attractive relative to bonds, they still offer better returns.
“You also have the potential for earnings growth. Stock investors should think in multiple years, not just this year,” Jaffee said.
(The opinions expressed here are those of the author, a columnist for Reuters.)
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By Jamie McGeever in Orlando, Florida; Editing by Christopher Cushing
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Jamie McGeever
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