Stocks may be headed for another selloff according to RBC’s ‘hedge fund hot dogs’ basket

Date:

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,
+1.24%
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.

Source: RBC

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.

Source: RBC Capital Markets

It is noteworthy that megacap tech names such as Microsoft Corp. MSFT,
+0.83%,
Alphabet Inc. GOOG,
+2.56%,
Amazon.com Inc. AMZN,
+2.38%,
Meta Platforms Inc. META,
+3.13%,
Apple Inc. AAPL,
+1.40%
and Tesla Inc. TSLA,
-0.81%
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,
+0.85%
and Nasdaq Composite COMP,
+1.49%
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.

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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