Hedge Funds Sell Financials as Economic Outlook Sours, Goldman Says
(Bloomberg) -- Hedge funds ramped up their selling of financial stocks as US economic growth shows signs of weakness and the sector approaches a key technical level.
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Despite financials notching their best weekly gain of 2024, hedge fund managers net sold for the third straight week — the largest bout of net selling in two months — data compiled by Goldman Sachs Group Inc.’s prime brokerage desk for the week ended May 10 show. The funds have sold the sector short in 14 of the last 16 weeks. Capital markets, financial services, and insurance were some of the worst hit subsectors with every area, excluding mortgage REITs, net sold over the period.
“Going into year, the sector was underpositioned as economic growth was surprisingly better,” said Charlie McElligott, a cross-asset macro strategist at Nomura Securities International Inc. “Ultimately positioning got a bit long in the tooth, and into diminished economic prospects, it’s being reduced.”
The selling came in the weeks following earnings reports from many of the major US financial firms. First-quarter results included some of the biggest banks reporting net interest income misses and underwhelmed investors who were looking for better guidance given the shift in rate-cut expectations. Still, some trading desks notched windfall profits.
With earnings now in the rear view, funds are monetizing and reducing their sector exposure, as the horizon looks cloudier, McElligott said.
Financials, considered a cyclical sector with high sensitivity to economic growth, are likely to struggle as the US economy slumps. First-quarter US GDP growth slowed more than expected while US consumer sentiment declined in early May to a six-month low.
The S&P Financials Index is outperforming the broader benchmark year-to-date. But from a technical analysis point of view, the sector is closing in on overbought levels as it hits a 65 reading on its relative strength index indicator.
“What will be the big challenge this week for financials is the March highs coming into play, said JC O’Hara, chief technical strategist at Roth Capital Partners. “Price is approaching the level which may act as resistance, especially with an RSI nearing 70.”
Overall, hedge funds net bought US equities for a fourth straight week. Macro products — including indexes and ETFs — were net bought, while single stocks saw the largest net selling in four months. Nine of 11 sectors were net sold. Consumer discretionary, financials, and health care bore the brunt of the selling, while energy and real estate were the only sectors net bought.
--With assistance from Bre Bradham.
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