Last week, after 19 green weekly candles in the S&P (out of the past 22), we said that the stock meltup would continue as hedge funds had just shorted the most stocks since the start of 2024 that week. And although such a counter-move by the smart money usually presages a continued squeeze higher, we were wrong and for once (after many weeks of losses) hedge funds were right because even though stocks traded higher on Friday, they still fell -1% on the week as investors digest a steady stream of procyclical data against a backdrop of soaring rates and oil, as well as rising geopolitical tensions (a deeper dive reveals that Copper, Power Consumption, and Megacap Tech were among the biggest gainers (in no small part after we highlighted the first two in our article "The Next AI Trade", while Bitcoin Sensitive Stocks, Most Short, and Non-Profitable Tech underperformed).
- So was last week a fluke? We'll find out soon enough, but what we know for a fact is that hedge funds continued to press their shorts aggressively and according to Goldman's Prime Brokerage, "equities were net sold for 4 straight trading sessions into NFP, driven by short sales outpacing long buys ~5 to 1, and HFs net sold both Macro Products and Single Stocks." Furthermore, consumer discretionary - formerly a darling sector for the smart money - was among the worst performing and the most net sold sectors on the week, as managers reduced long positions every day in the sector this week and shorted Retail ETFs.
- Below we excerpt from the must read Goldman Weekly Equities Rundown report, which we believe is an indispensable piece for every serious trader as it reveals what Goldman's own traders think and do (not its useless research desk which merely feeds the bank's own traders with institutional flow and does nothing more than validate the chasing of momentum), and below we excerpt from the latest full report for the benefit of our premium and professional readers (full analysis available to our pro subscribers in the usual place).
- Prime: US equities were net sold for 4 straight trading sessions into NFP, driven by short sales outpacing long buys ~5 to 1, and HFs net sold both Macro Products and Single Stocks. Consumer Discretionary was among the worst performing and the most net sold sectors on the week, as managers reduced long positions every day in the sector this week and shorted Retail ETFs.
- Shares Sales Trading: Desk flows were mixed on the week with LOs finishing better for sale in Consumer Disc, Healthcare, and Info Tech. Hedge fund flows were more muted, with notional flows finishing slightly better to buy. As UST 10-Yr yields retraced Nov highs, we saw supply in the more rate sensitive pockets of the market and across the Retail complex within consumer.
- Futures Sales Trading/Strats: Equities faltered this week ahead of the stronger-than-expected payrolls data on Friday as rates rallied and geopolitical risks weighed on sentiment. However, funding spreads remained elevated, suggesting investors likely have a fairly comfortable cushion before a selloff might lead to some capitulation of long positions. The short/medium/long term trend levels in our systematic models help quantify this phenomenon – S/M/L levels for SPX are 5107 / 4833 / 4591.
- Derivatives Sales Trading: For the first time this year, we saw real demand for protection on Thurs, as the GS Panic Index reached its highest level since last fall, and 3.04m QQQ puts traded (the third most ever). Gamma positioning has rolled off as dealers were lifted on skew – We now model dealers long only 1.5bn in gamma and they will continue to get shorter on the downside.
- ETF Trading: China ETFs were net bought on the ETF desk this week, driven by activity in FXI (H-shares) and MCHI (H-shares & A-shares). With local market closures on Thurs/Fri, ETFs were the vehicle for price discovery – FXI traded over 41m shares on 4/4. However, there has not been a full force re-entry into the space, as confirmed by the lack of primary flows into China ETFs.
- Baskets & Themes: Introducing the GS 1970s Inflation Comeback basket (GSXU1970), which is composed of real economy industries that have outperformed the market when inflation resurged in the late 1970s. The lack of investment interest has led to disciplined management teams, and valuations, balance sheets and return of capital provide support while waiting for inflation to inflect. These stocks also tend to do well when Mag7 underperforms and during geopolitical flare ups, which have occurred.
- Sector Specialists: The NDX continues to bounce around. While the key tenants of the Tech bull case remain intact, there has been an emerging debate around near-term A.I. momentum and the linearity into the 2H of the year (especially as non-AI spending in Tech appears set to improve) – something investors will be watching closely into earnings. In Consumers, although enough companies have given cautious updates and higher gas prices remain an increasing topic to show us that sentiment has changed this week, we are not sounding the alarm on consumer spending and do not think a coordinated slowdown is likely.
