Flight To Safety, Or Buy The Dips

Bank of America/Merrill Lynch released their Hedge Fund Monitor report titled, "HFs positive in April", May 3, 2010.

Overall, HFs still remain cautious on US equitites, further selling the NDX. At the same time they added to their very net long position in metals. They also continue to be very short the Euro/long the USD and pulled back somewhat on their curve steepening trade.

Long/short HFs kept their market exposure last week at ~25% net long~ well below the historical average of 35-40%. Additionally, they switched to high quality stocks from low quality while moving into growth relative to value. At the same time Equity Market Neutral stayed very net long equities, but also began to favor high quality stocks. We also estimate Macro HFs moved into a net short with respect to US equities last week while continuing to buy the Emerging markets.

Some other notable HF moves from the report include, 

HFs modestly added to their net long position in gold last week.

Large specs reduced some of their crowded long in crude oil last week.

This activity was telegraphed last week with market experts recommending value stocks that are typically defensive in nature, like health care and consumer staples. Big pharma names like Merck and Pfizer gave investors approximately a 2% pop today while the overall market dropped over 2%. Oil also dropped 4%, in a reversal of recent activity in this space. A majority of the news released was bearish, leading investors to wonder if this is a start of a correction. The market has been completely bewildering, with the Dow increasing and decreasing in triple digit increments. The VIX, which acts as a barometer for volatility for the S&P 500 has increased over 18% today, to a closing of 23.84. Some feel higher levels of volatility could signal a negative outlook for stocks. So if you cannot stomach too much risk and cannot sleep at night with high levels of volatility, you might want to consult with your broker/advisor.

Although the negativity appeared to dominate the headlines, there are those who are a little more optimistic like Jim Cramer of Mad Money.

The shorts and panicked sellers have a “buffett of horribles” to choose from, Cramer said Tuesday, to try to knock down this market. But that’s no reason to sell and run.

Whether it’s Europe’s debt problems, a government-induced slowdown in China or falling oil prices, the bears have harped on any negativity they could find to hurt stocks. They’ve been jumping all over financial regulation, the failed car bombing in New York’s Times Square and the Australian mining tax, too.

But while Cramer admitted that Europe would continue to weigh on investors, and they’ll have to let it play out, he still thinks there are plenty of opportunities in this market.

We have reached a level of so much uncertainty in so many different areas, that it makes it difficult to confidently decide what to do with equities in this environment. Do we follow hedge funds and reduce our equity exposure after the big drop we just experienced? Or do we consider this an opportunity to buy the stocks we regret not getting into during the preceding bull run?


Do not rely solely on the opinions of this blog or any other site when making an investment decision. Any investment could result in the risk of loss of capital. Please consider seeking professional advice before initiating your investment ideas. 

Disclosures: Long BAC, Long C, Long F, Long DNDN, Long GLW, Long SPF, Long BP, Long NKE, Long HD