Bullish relative to stock pickers
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Published May 09, 2023 • Last updated May 09, 2023 • 2 minute read
Not since 2019 have quants been this bullish relative to stock pickers. Photo by Regis Duvignau/Reuters As evidence of how hard it is to get a handle on markets right now, consider the diverging postures of human and computer-guided investors, by one definition the widest in four years.
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Access articles from across Canada with one account. Share your thoughts and join the conversation in the comments. Enjoy additional articles per month. Get email updates from your favourite authors. Quant traders — those allocating assets based on momentum and volatility signals — have been forced into a buying spree, thanks to muted price swings and resilience in equities. For the first time since December 2021, their stock exposure rose above neutral readings, according to data compiled by Deutsche Bank AG.
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By contrast, discretionary investors, who use economic and earnings trends to guide their decisions, have kept bailing in the face of a multi-month advance, with positioning hovering near a one-year low.
Not since 2019 have quants been this bullish relative to stock pickers, according to Parag Thatte, a Deutsche Bank strategist.
The data highlight mounting tensions in a market where the S&P 500 has been stuck near the midpoint of 2022’s drawdown for weeks. From corporate profits to monetary policy, convincing arguments exist on both the bullish and bearish sides of the debate.
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Article content Earnings are falling, but first-quarter results have come in better than feared. And while bond and equity bulls are embracing the prospect of interest rate cuts, skeptics say such hopes are at odds with the United States Federal Reserve’s own forecast.
“The market will remain stuck in the mud — with severe dispersion below the surface — balancing a base case of durable U.S. growth against legitimate, if growing, tail risks,” Tony Pasquariello, Goldman Sachs Group Inc.’s head of hedge-fund coverage, said in a note.
In a sign of trader indecision, the S&P 500 has closed within 50 points of the 4,155 level for five straight weeks. That’s a threshold that shows the market recouping half of its losses from last year’s bruising selloff.
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Article content Both rules-based traders and stock pickers ended 2022 with defensive positioning after a year of market turbulence amid fears of a recession. Then, once economic data came in better than expected and stocks staged a powerful bounce in the new year, systemic money managers were forced to unwind their short positions.
Meanwhile, their discretionary counterparts have clung to their cautious stance. Take hedge funds. The industry’s long/short ratio tracked by Goldman last week dropped to the lowest level in more than a decade.
The last time positioning between quants and human traders diverged like this was in mid-2019, when stock pickers had to spend the following months stepping up exposure and chasing gains, according to Thatte at Deutsche Bank.
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Article content With equities falling last week and volatility rising, systematic macro strategies are expected to be sellers in the coming days. According to an estimate from Morgan Stanley’s trading desk, the cohort is likely to offload US$5 billion to US$10 billion of stocks this week, compared with a pace of buying of as much as US$20 billion two weeks ago.
6 ways to make more income from your investments Stagflation is the risk that eludes investors mispricing markets 5 market bubbles including one that is just starting to blow up now “Systematic and discretionary usually are highly correlated,” Thatte said. “Systematic strategies typically follow market cues on trend and volatility. So it’s hard for them to independently keep leading the market unless discretionary also steps in.”
Bloomberg.com