Investing Update: Hedge Funds Buys & Holdings
What I'm buying, selling and watching
Friday completed what has been a very choppy August for the stock market. So far in August the S&P 500 is down 4% and the Nasdaq is down 5%.
As readers of Spilled Coffee know, my outlook for August was not bright. I had said to temper August expectations in Investing Update: Why Sentiment Matters.
What has really faltered in August has been the 10 largest stocks in the S&P 500. They have led the market higher, but now are leading it lower.
Those same popular stocks are the leaders in the Nasdaq as well. The top 5 account for almost 2/3 of the Nasdaq’s YTD returns.
As the year progressed, it was seeming like the participation was going to widen from the largest and most popular tech stocks. Then August hit and all the S&P 500 companies are hitting bumps in the road.
To get out this current range, which if the year ended today investors would be very happy with a S&P 500 return of 15.21% and Nasdaq return of 30.84%, the participation really needs to widen. With seasonality now kicking in for a traditionally slow August and September for the stock market, maybe we are seeing the highs for 2023. If that proves to be the case, nobody should complain about this level of returns.
Is Momentum Shifting?
With August not being so friendly to investors, we should expect some data to start reflecting that. To begin August, 126 of the 500 S&P companies were 5% or less from their 52-week highs. Now only 70 are within 5% of their 52-week highs.
21% of the Nasdaq reached new 12-week lows this week. That takes it back to levels not seen since fall of last year.
The number of S&P 500 stocks above their 200-day moving average has fallen to 48.31%. That the lowest level since June 2nd.
We’re also seeing investor sentiment turn bearish. For the first time in 12 weeks the bears now outnumber the bulls. Sentiment is shifting.
The big question is if this bearish trend continues, or if we see things start to reverse back to how the market performed for the first seven months of the year. Isn’t that always the question though? Is the next leg headed higher or lower? Ups and downs will continue and nobody knows which way is coming next.
Is This Housing Market Sustainable?
One area of the economy that has a direct relationship to the stock market and investor sentiment is housing. For most Americans their home is their largest investment. We saw what housing can do to the overall economy and stock market back during the GFC crisis.
The current state of the housing market has done the complete opposite of what everyones has expected, dating back to when COVID started.
Mortgage interest rates have now climbed north of 7%. They’re now at the highest levels in over 20 years. Do they continue their climb even higher? Are 8% mortgage rates coming?
Those high mortgage rates have taken the monthly mortgage payment upward. The chart from Michael McDonough illustrates what a monthly mortgage payment would look like for a new home buyer in the US, based on the median existing home price and the average 30 year fixed-rate mortgage. This also assumes a 20% down payment.
This has caused a frozen housing market. Prices have stayed level and yet there are no homes for sale. Existing homes sales are now starting to fall to levels not seen in over 20 years.
You would think this would make something within housing crack. But it hasn’t. If it hasn’t cracked already, will it?
Are REITs Oversold?
We continue to hear the worries over commercial real estate. There has been stories about firms being ready to scoop up commercial real estate. A week ago this appeared in the WSJ. Wall Street Is Ready to Scoop Up Commercial Real Estate on the Cheap.
This would explain why REIT positioning is now at GFC levels.
How do REITs compare to the other asset classes? The BofA global fund manager’s survey shows that basically nobody likes REITs. The positioning versus history is just on a different level now.
Even retail investors are avoiding REITs.
Is this much of a slide justified? The fears over commercial real estate have been talked about for many months. I even wrote a post on this topic in April, The Worries Over Commercial Real Estate.
So is this selling overdone? Does this mean there is an opportunity here? There can’t be any sellers left. If you haven’t been scared off already, then you’re still invested and think the fears over the CRE are overblown. Literally everyone is bearish REITs. Usually that means it’s a time to buy.
This is looking like a time to look for opportunity within this sector, as I think we’re reaching oversold territory now. I’m starting to look at individual REIT companies. Among them are American Tower AMT 0.00%↑, Welltower WELL 0.00%↑, Simon Property Group SPG 0.00%↑ and Prologis PLD 0.00%↑. From an ETF standpoint, I like Vanguard Real Estate ETF VNQ 0.00%↑.
Hedge Fund Buys & Holdings
The 13F filings came out this month on what hedge funds bought and what their currently holdings are through Q2.
The Q2 buys were very heavy within semiconductors. The most popular were Nvidia NVDA 0.00%↑, Taiwan Semiconductor TSM 0.00%↑, Advanced Micro Devices AMD 0.00%↑ and VanEck Semiconductor ETF SMH 0.00%↑.
The mega-cap tech stocks of Amazon AMZN 0.00%↑, Microsoft MSFT 0.00%↑ and Meta META 0.00%↑ were also popular buys.
From an overall holdings standpoint through Q2, we can tell just how dominated it is by mega-cap tech stocks. The most popular stocks in the market, which also are among the biggest winner YTD are hedge fund’s biggest positions.
The below chart shows the overall exposure of hedge funds to mega-cap tech stocks relative to history. Dating back to 2016 when Morgan Stanley started to track this data, the current level is the highest net exposure hedge funds have ever had to mega-cap tech stocks.
The Coffee Table ☕
Barry Ritholtz wrote a great piece titled Pix vs. Flix. It’s a good reminder that any single data point can be interpreted various ways. It’s hard to distinguish what’s noise and what’s a signal. For example, a long-term investor with years or decades of an investment horizon should avoid getting pulled into short-term noise. Barry ends it perfectly with this, “The long term is a series of short terms. Never confuse the two…”
The White Coat Investor tackled a long debated and talked about decision for parents. How to Open a Roth IRA for Your Kids (and Should You)? This is the most researched and informative thing I have come across on this topic. Very well researched and then simply relayed to the reader.
Spectacularly Wrong by Michael Batnick was such a spot on post on how everyone got everything wrong this year. Everyone said higher rates would crush consumers and the economy. The higher interest rates came but things have thrived. It turned out the rates don’t touch or affect as much as everyone thought. Michael made some great points with some great charts in this piece.
If you’re a football fan, Hard Knocks on HBO is a must watch every year. This year the series is on the New York Jets. Hard Knocks: Training Camp with the New York Jets. Much of the shows are focused on Aaron Rodgers. But it’s not overdone and the crew remains in the background and catches so much without players even realizing they’re there. They shoot the footage and a week later the show is aired. The best reality type show there is.
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Disclaimer: This is not investment advice. You should not treat any opinion expressed as a specific inducement to make a particular purchase, investment or follow a particular strategy, but only as an expression of an opinion. Do your own research.