Look for Market to Soar When Hedge Funds Stop Selling

From Vince Farrell at RealMoney:

A report making the rounds today [Wednesday] detailed managers' Form 13-F filings. This report shows what managers own. Their holdings of U.S. stocks by and large plummeted. The decline in the size of the positions could be from market share losses or the sale of a position, or most likely, both.

Atticus Capital reduced its holdings from $8.1 billion to $510 million. Tudor Investment from $5.7 billion to $453 million. SAC Capital Advisors said its holdings of U.S.-based stocks (and options and converts) were $7.7 billion vs. $14.4 billion last quarter. Moore Capital said the "value of its 13-F securities fell 69% to $1.4 billion." And on and on.

Those are astonishing numbers. If you are a bear and are short, you must be cognizant that there is a tremendous amount of firepower on the sidelines.

Much of the proceeds from the intense selling is sitting in cash. Yields on one month and three month Treasury bills were as low as 0.04% and 0.07% a few days ago.

Some of this cash has been earmarked for redemptions but some is because hedge funds are sitting on their hands. Many of these hedge funds are down 15%, 20%, even 40%. Hedge funds are not paid unless they earn a positive absolute return. More poignantly, their business model is threatened by such bad numbers because they are not paid egregious fees to lose people money. 

What I think is going to happen is that when the market moves higher, it will do so in a tremendously violent way, with perhaps a move of as much as 1000 points on the Dow in a day and maybe 2000 points over a few days. 

This will be caused both by short covering and also by hedge funds rapidly pouring money back into the market.  A fund's viability is threatened if it is down 20% or 30%. It is far more viable if it is down only 5% or 10%. If the hedge funds sniff out that the market is moving up, an avalanche of cash will come back into the market, causing the market to soar.

This is why I have been scaling in. I do not think that we will see a classical bottom, at least in the near-term. This has not been a classical sell-off so it is unlikely to be a classical trough. The rally will be red hot and waiting for an all clear signal means you will miss it - at least that is my opinion.

Comments

[Steven Hansen:]

"it will do so in a tremendously violent way, with perhaps a move of as much as 1000 points on the Dow in a day and maybe 2000 points over a few days."

i agree. you left out the 1000 point drop the next day. this is the only way to generate profits. the hedge funds are going to have to pump the market. they are big enough to do it. it is like fixing a horse race and it will keep the investors on the sidelines. this is the time to be a trader.

2008 Nov 20 03:27 AM

[contracontr...:]

We are midst of a negativity bubble and bubbles always bust violently.
This time almost everyone is riding on the downside momentum until suddenly "cash" will crash.

2008 Nov 20 08:30 AM

[Malkiel:]

We can only hope our 401k mutual fund managers are smart enough to realize that it's time to stop hoarding cash and start "averaging down" their bargain buying before the hedgies begin their orchestrated manipulation of the market indexes upward...

2008 Nov 20 10:21 AM

[Gary Noffke:]

This was my pick to read from seeking alpha this morning. Good article. Did you notice the gold market yesterday? It was up $30 between nine and ten AM and dropped $30 before one PM. Seems the same major players are buying and selling the same thing every day and taking the profits. If it is legal to do this, it shouldn't be. The same thing is happening with stocks. The general markets move slower than gold, but I suspect if live charts were available to observe a single stock's volume and price, you would find exactly the same thing going on. Small investors can't play this game. This is the first thing that needs to be fixed to stabilize the market. This has run the entire economy down and it seems the SEC, the FED and the US Treasury are encouraging it. It's the greed eating HedgeHogs rather than supply and demand setting value.

2008 Nov 20 10:21 AM