Despite intermittent rebounds, U.S. financial markets have been on the decline, with the leading benchmark indexes slumping in year-to-date trading, covering investors’ portfolios with red ink.
Even robots are having a rough time making sense of the market. The AI Powered Equity ETF has slipped close to 9 percent, falling behind the benchmark S&P 500 Total Return Index by roughly 5 percent through Feb. 8.
But are traders—institutional and retail—buying the dip or selling the rally? In other words, who’s buying and who’s selling has become the talk of Wall Street, especially as analysts try to steer their ships through the turbulence.
Business media and industry observers have been combing through the quarterly 13F forms, a Securities and Exchange Commission (SEC) document submitted by institutional investment managers with more than $100 million in assets.
It essentially spotlights what the whales—investors who own a vast percentage of a company’s shares—are loading and ditching.
Berkshire Hathaway’s fourth-quarter stock holdings, for example, showed that the Oracle of Omaha is still a big Apple fan. Warren Buffett also bought Activision Blizzard shares ahead of Microsoft’s acquisition and added to the firm’s Chevron positions.
Stanley Druckenmiller’s Duquesne Family Office sold all of its shares in Facebook parent Meta in the October-to-December period, while reducing its positions in Moderna and Zoom Video. It also revealed new vast stakes in Chevron and Snap.
The belief among market analysts is that professional investors are being patient when it comes to buying the dip, says JPMorgan Chase data.
The Wall Street titan has been monitoring the buy and sell orders. The bank examined the Jan. 24 trading session to find that there were close to $8 billion more sell orders than buy orders at the midday mark. However, by the end of the trading session, when the indexes turned into positive territory, buy orders surpassed sell orders by approximately $10 billion. Most of the rally was driven by institutional investors rather than armchair traders.
At the same time, hedge funds monitored by Goldman Sachs are increasing their short positions again despite being clobbered by Reddit’s Wall Street Bets last year.
Short interest volume is growing, separate data from Leuthold Group highlight.
“With short interest leveling off and shorts underperforming again, we think the activity will only increase from here,” wrote Greg Swenson, a co-manager of Leuthold’s Grizzly Short Fund, in a note last week. “That, combined with a decreased amount of potential short-covering activity when markets move lower, will likely translate to continued volatility.”
Put simply, the whales are bullish on The Street’s favorite stocks and bearish on the so-called meme stocks that enjoyed remarkable gains amid the social media push last year. Nearly 18 percent of GameStop stock is shorted, while AMC shares are seeing about 21 percent.
Although they have accumulated immense levels of margin debt over the last couple of years, retail investors are engaged in the buy-the-dip mentality.
Fidelity data spotlight that its clients have been buying the weakness, with users placing four buy orders for every sell order.
Traders on the institution’s online trading platform executed more than two Amazon stock purchase orders for every sell order during its 7 percent rout ahead of its quarterly report. Investors also placed 2.5 buy orders for each sell order of Spotify Technology stock.
Moreover, retail traders are also shifting their investment strategies, moving on from many of the meme investments.
“While 2020–2021 saw occurrences of meme stock rallies, retail investors are now engaged in more targeted equity segments like Metaverse Stocks as some of these firms have shown strong fundamentals while being aspirational for the younger investor,” Dan Raju, the CEO of Tradier, a financial technology and brokerage services firm, told The Epoch Times.
More mom-and-pop traders are likely to transition to index funds, Raju said.
“As the market size continues to grow, adoption of Index funds is expected to rise because it’s an easy way for self-directed investors to diversify their portfolios and also save advisory fees,” he said.
So, is buying a wise strategy right now? Goldman Sachs and Morgan Stanley have become increasingly bearish.
David Kostin, Goldman’s chief equity strategist, recently slashed its year-end S&P 500 target from 5,100 to 4,900. Michael Wilson, Morgan Stanley’s chief equity strategist, also lowered his year-end S&P target to 4,440.
The main drivers of the market, they say, are inflation and the Federal Reserve.
When the January consumer price index report showed that inflation surged to a four-decade high of 7.5 percent, “markets had priced in a 90% chance of a 50bps hike at the March meeting and 6–7 25bps worth of hikes by the end of the year,” Wilson said in a note.
Wilson ultimately believes there will likely be “a polar vortex for the economy and earnings.”
This sentiment was shared by Robert Johnson, chair and CEO at Economic Index Associates, warning that investors should anticipate weaker near-term gains.
“The near certainty of Fed tightening and rising interest rates in 2022 means that investors should lower their expectations for broad equity market returns,” Johnson told The Epoch Times.
But the market is still forward-looking, the author of “Invest with the Fed” said.
“We will certainly see higher interest rates in the future,” he said. “But one must recognize that the stock market is forward-looking. That is, higher interest rates are baked into the prices of securities. What isn’t known for certain, however, is how high rates will rise.”
As Johnson said, the financial markets are driven by narratives. With multiple ongoing storylines, such as rampant price inflation, Fed embarking upon quantitative tightening, and geopolitical tensions in Eastern Europe, “the current narrative has been increasingly negative.”
The next key development will be first-quarter GDP. The Federal Reserve Bank of Atlanta, Wells Fargo, and the CNBC Rapid Update are forecasting growth at or below 2 percent.
But, like Buffett’s famous quote, will investors be greedy when others are fearful or fearful when others are greedy?