(Bloomberg) — The gloom overflowed from institutional investors when it came to US equities. That may have been just what the market needed.

It’s a contrarian view, based on the logic that floors are found when sellers run out of money, which gained supporters this week as the S&P 500 experienced its biggest rally in two years, just as the Federal Reserve was threatening interest rates a whopping 10 times through 2023. increase .

The five-day rise of 6.2% provided a ray of hope for those who hoped a two-month sell-off by professional speculators was severe enough to explain all the bad news that has been weighing on investor psyches of late. Stock pickers, computer-assisted traders and hedge funds have reduced their positions at one of the fastest rates in years, overwhelming retail buyers whose bids kept markets high in 2020 and 2021.

“I just think there aren’t that many sellers out there anymore,” Jim Paulsen, chief investment strategist at Leuthold Group, said by phone. “This often creates a bottom. It’s not so much that buyers come. It’s that selling stops.”

Through Monday, the S&P 500 had fallen in 9 out of 11 sessions, dropping 13% from its January 3 record. Notably, that streak ended on the same day a Bank of America survey revealed growing skepticism about stocks among global money managers. They reported that they have raised cash to its highest level since April 2020, amid widespread expectations that a bear market for stocks is inevitable.

The S&P 500 rose nearly 7% over the next four days to record its best week since November 2020. The four-day gain of the tech-heavy Nasdaq 100 topped 10%, yielding a gain of 8.4% for the week. The VIX volatility meter closed below 25 for the first time since mid-February.

“We had priced in much of the Fed’s action even from the decline we saw in US markets in January, so the stock market was well prepared for what the Fed said,” Bloomberg Intelligence’s Gina Martin Adams said on Bloomberg. TV. † “We’ve literally priced in more than expected before every tightening cycle we’ve seen since the 1970s.”

Institutional selling has been a feature of US stocks since the beginning of the year. Macrosystemic strategists, including volatility-focused funds and trend-following commodity trading advisors, dumped $200 billion in global equities in the first two months of 2022, according to data collected by Morgan Stanley’s trading arm.

Hedge funds cut their equity exposure in February to its lowest level in nearly two years and have since continued to contract into the new month, according to data collected by the prime brokerage of Goldman Sachs Group Inc. Their net leverage fell 7.5 percentage points in the two weeks to March 11, the biggest drop in a comparable period since at least January 2016, Goldman data shows.

JPMorgan Chase & Co. strategist Marko Kolanovic. found a similar trend in the fast-money cohort. Exposure for volatility-sensitive investors, including hedge funds and risk-parity portfolios, has fallen to the lowest 10th percentile of a historic range. Such light positioning is one of the reasons Kolanovic urged investors to take advantage of the latest sell-off to encourage risky bets.

“Current risk positioning is very light. This is the result of high and ongoing volatility and risk aversion caused by global geopolitical developments,” Kolanovic wrote in a note on Thursday. “And for this reason, the risks are upwards.”

There were signs that all the de-risking fund managers were ready to strike. For example, net purchases by Goldman’s hedge fund clients on Tuesday and Wednesday were the 12th largest over a comparable period in the past decade.

Leuthold’s Paulsen said that in March 2020, when the market rose after a 35% drop, it wasn’t because buyers got in. It was because the sale was made – and something similar is unfolding now, particularly within the institutional community.

A number of banks have lowered their year-end targets for the S&P 500, which “reflects that they are all craving bad times, which is a contrarian signal,” Paulsen said. “They’re not going to sell anymore because they’re waiting for the market to drop further, because that’s what they’re positioned for now.” And if the stocks continue to rise, those players will feel the pressure to get back in.

Aside from positioning, bulls were boosted by some macro developments. China intervened to stop a plunge in its stock market, sparking a furious rally after signaling it would ease a crackdown on tech companies. As fighting continued in Ukraine, several headlines suggested that talks had made some progress.

Retail investors were not deterred by the sale during the first year, conditioned by years of declines in purchases and letting them pay off. Individual investors have netted $39 billion in shares since January, the largest right now in at least five years, according to data from JPMorgan Chase & Co. strategist Peng Cheng.

Overall, though, home merchant participation has fallen to 17% of total volume, from about 24% a year ago, according to an analysis by Jackson Gutenplan and Larry Tabb of Bloomberg Intelligence. The number of shares that have changed hands has reached an all-time high, leading to a high in the average traded share price, meaning the market is affected by the weight of institutional investors.

“Institutional traders, big money managers, asset managers and hedge funds, their moves have to do with current market conditions — a lot of volatility, a lot of uncertainty, inflation concerns, geopolitical concerns,” Gutenplan said in an interview. “As the market continues to decline, institutions selling out of positions are overwhelming retail buying pressures.”

The data shows a market where war in Europe and revived central bank hawks have brought professional investors back into action after two years of retail domination.

Retailers have had a “fantastic” run since the pandemic broke out, said Ryan Nauman, market strategist at Zephyr. But “although retail has gained a lot of momentum over the past two years, institutional money still outweighs retail money, and it will still move markets.”

Shawn Cruz, senior market strategist at TD Ameritrade Inc., looks at a measure of retail investor sentiment tracked by his company, the Investor Movement Index (IMX). Customers have reduced their exposure to stocks, although they’re still buying, Cruz says — they’re just much more selective. Many are selling out of highly regarded tech companies and moving instead to “not-everywhere-soon” companies.

“There’s a bit of what I think is a budget cut where they weren’t just buying everything across the board,” Cruz said on the phone. “As much as there’s been pullbacks and there’s a lot of volatility, you’re seeing some selling in the more valued areas and the buying is very targeted.”

Others also see retail involvement as a possible indication of a low. Liz Young, head of investment strategy at SoFi, says mom-and-pop investors tend to follow institutional trends, meaning the cohort of home traders may soon “join that outflow party.”

“That’s where you get more confirmation from, okay, the bearishness is increasing,” she said in a Bloomberg Radio interview. “Maybe you’ll get extreme bearishness, and you usually get out of that.”

This post Scorching stock rally stems from exhaustion among institutions

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