After the U.S. stock market rebounded fiercely and institutions frantically bought the bottom, Wall Street began to warn: be careful of profit-taking!
After last month's crash, in the European and American central banks may have ended the interest rate hike cycle, long-term bond yields fell and other positive stimulus, U.S. stocks continued to rebound, Goldman Sachs cited data that last week institutional investors actively bought U.S. stocks at the fastest pace in two years, but a number of Wall Street banks believe that the rally in U.S. stocks will not last.
Institutions are crazy about buying the bottom
According to a previous report released by Goldman Sachs' prime brokerage trading platform, the week ended Nov. 3 saw the largest five-day buying spree since December 2021 as institutional investors poured into the U.S. stock market.
Goldman Sachs said that hedge funds' long positions in technology stocks reached an eight-month high. In addition, consumer companies such as restaurants and fashion also received large net buys, but healthcare and financials stocks suffered net selling.
Overnight, the Dow and S&P both rose for seven consecutive days, hitting their highest in nearly seven weeks since September 20, and the Nasdaq rose eight days in a row to the highest in nearly four weeks since October 11. The S&P and Nasdaq both posted their longest two-year winning streak since November 8, 2021.
However, small-cap stocks have performed against the broader market, with Russell small-cap stocks falling for two straight days from a two-and-a-half-week high. Value stocks have also underperformed growth stocks.
The underperformance of small-cap stocks suggests that there are some underlying concerns about the impact of the economic downturn, inflation and the Federal Reserve's continued interest rate hikes. These companies have a more limited revenue stream and a weaker ability to pass on higher costs than very large market capitalization companies. They are also more sensitive to slower growth and changes in borrowing costs.
The weakness of value stocks relative to growth stocks may also mean that investors are not optimistic about the performance of the broader U.S. economy.
The Goldman Sachs report also noted that the biggest buying by hedge funds was concentrated in North America, while in addition to Japan, Europe and Asia also saw net outflows.
Wall Street big banks warn: the rally is not sustainable
However, Michael Wilson, the big short in the U.S. stock market and the chief strategist of Morgan Stanley, poured cold water on the rally of the U.S. stocks, believing that the best week of the broader market in a year was just a bear market rally, and the current rise in U.S. stocks lacks technical and fundamental support.
Wilson noted that with a gloomy outlook for corporate earnings, weak macroeconomic data and deteriorating analyst perceptions, "it's hard to be more excited about the year-end rally." ”
He believes that the rally in U.S. stocks "looks more like a bear market rally than the beginning of a sustained rally." ”
Chris Montagu, another strategist at Da Mo, also believes that the contract fund flow tracking the benchmark index last week was mainly short-covered, and he believes that the overall performance of institutions in the US stock market is still "moderately bearish".
Montagu also noted:
"In short, profit-taking leads to clearer market positioning, which reduces overall position risk, and the likelihood of a near-term upside in the near term appears to be less likely against the backdrop of further short-covering. ”
A number of major bank analysts believe that the rally in US stocks is difficult to sustain against the backdrop of rising interest rates and slowing economic growth.
It is worth mentioning that November is also the beginning of the bear market in 2021-22.
In November 2021, the Nasdaq's rally peaked, and the S&P 500 also peaked a few weeks later. Then the long bear market began, with the Nasdaq tumbling 35% and the S&P 500 falling nearly 30% from the end of '21 to October last year.