A group of the most popular stocks of the world’s largest hedge funds are once again underperforming the broader market. According to a team of analysts at RBC Capital Markets, this is a sign that US stocks are headed for another explosion.
For several years now, a team of equity analysts led by Lori Calvasina, RBC’s head of US equity strategy, has been tracking a basket of what it calls the “hedge fund hot dogs” – the most popular S&P 500 SPX,
stocks owned by 300 of the world’s largest hedge funds. The analysts update the basket four times a year after hedge funds announce their shareholding breakdown at the end of the quarter.
To see: Hedge funds pile up a $125 billion bet against the S&P 500’s big summer rally
Since creating the basket, the team has noticed a pattern: When the hedge fund hot dogs start to underperform an equally weighted version of the S&P 500, it’s often a sign that a broad sell-off of stocks is looming. was standing.
It happened in 2018, when the basket started underperforming about a month before the sale in the fourth quarter of that year. And after a brief period of stabilization this summer, hot dogs are once again underperforming.
The indicator has also worked in the other direction: Calvasina and her team explained that the hot dog outperformance in April and May made them optimistic that a near-term bottom could be approaching.
The chart below shows the performance of the hedge fund hot dogs basket against the equally weighted S&P 500 index.
In recent weeks, the basket has again started to underperform.
“The weakness of this basket so far in 3Q22, when only 25% of the names on this list outperformed the S&P 500, is something we’re watching closely as it could be a signal that stocks generally be ready for another attack. volatility in the coming months,” the team wrote.
Here’s a breakdown of the basket’s constituents, ranked by the total dollar value owned by RBC’s 300 fund tracker.
It is noteworthy that megacap tech names such as Microsoft Corp. MSFT,
Alphabet Inc. GOOG,
Amazon.com Inc. AMZN,
Meta Platforms Inc. META,
Apple Inc. AAPL,
and Tesla Inc. TSLA,
are among the largest components of the basket.
Many of these are the same stocks that have propelled the market for most of the past decade from the S&P 500’s all-time high reached in January.
They also led the market lower during the historic sell-off that followed in the first half of the year.
To see: US equities largely higher as strong economic data boosts sentiment ahead of Powell’s speech
While the S&P 500, Dow Jones Industrial Average DJIA,
and Nasdaq Composite COMP,
were each on track to close higher on Thursday, all three benchmarks remained in the red all week. If the S&P 500 and Nasdaq reached Friday’s session at these levels, it would mark their second consecutive week in the red.