Hedge Funds Betting on Simultaneous Stock Falls and Index Rises – What’s the Deal?

The most recent report from Goldman Sachs Group’s prime brokerage addresses a troubling issue on Wall Street. There has been strong performance in indexes like the S&P 500 and Nasdaq Composite, but this seems to belie weakness in most U.S.-traded stocks. Investors have increased their bets against individual stocks while simultaneously increasing their long positions in equity indexes and index-tracking products. This trend suggests that investors are now heavily focused on megacap technology stocks, believing that they will continue to drive the market higher.

Hedge funds have been adding to short positions against individual stocks for 14 weeks, while they have been increasing bullish bets on U.S. stock-market indexes over the past three weeks. This is especially true for technology stocks like Apple Inc., Alphabet Inc., Microsoft Corp., Nvidia Corp., Amazon.com Inc., Tesla Inc., and Meta Platforms Inc. Meanwhile, selling pressure on individual stocks, particularly energy and financial names, has intensified.

Earlier this month, it seemed as if the rally in stocks might finally be broadening out as all three major U.S. equity indexes, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, logged their best week of the year during the week ended Nov. 3. However, hopes for broadening out had seemingly fizzled by Friday’s close. Mark Newton, global head of technical strategy at Fundstrat Global Advisors, stated that weak breadth could make it difficult for stocks to move much higher from here unless more stocks and sectors join in.

Most of the S&P 500’s 11 sectors are trading in the red year-to-date, while the top performers like information technology and communication services have seen double-digit gains. This discrepancy is a key focus for many investors. Greg Bassuk, chief executive officer of AXS Investments, expects strong earnings and hopes tied to the artificial-intelligence boom will continue to drive these stocks higher in the coming months.

Overall, the report from Goldman Sachs Group’s prime brokerage reflects the ongoing tension in the market as investors grapple with the dichotomy between index performance and individual stock performance. This indicates that there may be significant shifts in investment strategies in the near future.