Hedge funds positioned for a sharp slump in global equities have become too pessimistic and might have to turn bullish if stocks keep rallying, in turn sending the market even higher, Societe Generale SA strategists say.
Positioning is “so extreme” that no decline in equities “could result in a quick and drastic reversal of positions,” strategist Arthur van Slooten wrote in a note. “Potentially, that would even contribute to a market reaction in the opposite direction, sending equities and bond yields higher.”
After rising in March and April, the MSCI All-Country World index has given back hardly any of those gains this month despite worries about the health of US regional lenders and a recession. That’s as net short positioning on the S&P 500 stands near levels seen only during the global financial crisis, according to data compiled by Bloomberg.
“While we share a cautious view on the S&P, we have doubts about the extreme levels of caution we are seeing,” the team at SocGen said. Current positioning “would require a dramatic deterioration in the investment outlook” and any market correction “would almost come as a relief.”
This article was provided by Bloomberg News.