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How Panic Buying Turned To Panic Selling

Courtesy of ZeroHedge. View original post here.

In the latest indication of just how influential a handful of megacap tech stocks have become, Bloomberg pointed out Tuesday that an index of the most actively traded US stocks (a group that of course includes many of the FANG + Apple stocks that are beloved by both hedge funds and retail investors) has recently endured its worst run of losses in more than a year.

After underperforming the S&P 500 again last year (despite notching their best returns in years), hedge funds engaged in panic buying of the market leaders, which at the time seemed like they could only go higher for fear that their limited partners might opt to pull if they didn’t toe the Wall Street consensus. Goldman showed this in this recent table of the Top 50 most widely held hedge fund stocks, of which the bulk were tech names.

Now, that panic buying has shifted to panic selling.

According to Bloomberg, this suggests that the “fast momentum money”  – i.e., CTAs, risk parity and hedge funds – helped drive tech shares to their largest monthly drop since April 2016 last month. Tech stocks dropped another 2.5% on Monday before rebounding to lead stocks higher late Tuesday morning.

Active

Typically, the most heavily traded stocks aren’t the best performers and vice versa. However, during the first three months of the year, hedge funds and CTAs helped flip this trend on its head.

Now, Bloomberg is left wondering: Will smart money selling continue to drive tech stocks – and by extension the broader market – lower?

Traders created an environment where the most heavily traded shares were also the best performers. Market leaders can carry the market higher without any frenzied buying or selling. During the first three months of the year however, speculative buyers created a strange market quirk, in which the highest turnover shares were also the best-performing ones.

The fact that this relationship has now reverted to normal may be a sign that a phenomenon some warned of earlier in the year is coming to pass.

“The issue with speculator money is they can come in and drive prices up and once they see signs of something happening, they quickly leave and drag prices down,” Vitali Kalesnik, head of equity research at Research Affiliates LLC, told Bloomberg News in January.

As a reminder, earlier today Nomura warned that should the S&P drop just another 60 or so points to 2,535, CTAs would turn from neutral to “max short”, unleashing no less than $100 billion in selling, and sending risk assets tumbling as selling begets selling.


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