FX Evolution: Hedge Funds Are Selling Stocks Again…

Investors looking to profit in the stock market can get a sense of what to do by following big players. That includes institutional traders such as hedge funds.

They tend to be ahead of trend shifts, lowering their allocation to risky assets before a selloff. And by the time retail investors get the memo and panic out of stocks, they’re ready to buy. At the moment, they’re scaling back their investments.

Several reasons indicate why.

The stock market remains off its July highs. And it’s spent the week largely hanging out near its 50-day moving average.

Some sectors, like the Dow Transports, are trending lower. Typically, this sector tends to lead the overall market.

That suggests further downside may be ahead for stocks in the coming weeks. That would be normal for this time of year. It likely doesn’t mean a full-blown bear market, and it may not even hit a correction level.

Meanwhile, global liquidity has declined in recent weeks. That could make it more difficult for institutions to buy stocks on margin. Less margin in the market makes it less likely stocks can trend higher.

While stocks can likely still trend higher going into the end of the year, the next few weeks could be volatile. Investors should brace for a pullback in the coming weeks, and look for hedge funds to start buying as a sign the worst is over.

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