The stock market is facing a perfect storm of headwinds amid selling that’s rocked major indexes in recent days.
The behavior of hedge funds could make matters even worse, as forced selling from passive strategies pushes equities lower, says UBS.
The firm reveals a handful of recommendations to help traders withstand selling pressure.
As the stock market suffers through its most recent bout of selling pressure, it feels like a perfect storm of bearish factors have culminated simultaneously.
There are spiking Treasury yields, which have reduced the relative appeal of equities and exacerbated fears of a liquidity crunch.
Then there’s President Donald Trump’s trade war, which has rattled nerves worldwide and left investors to assess the potential market fallout.
There’s also the unfortunate fact that corporate share buybacks — which have buoyed stocks during lean times throughout the 9-1/2-year bull market — are in a market-wide blackout period prior to earnings season.
And if all of that wasn’t stark enough, hedge funds are doing their part to make the experience as miserable as possible. After all, it’s their most popular holdings that are absorbing the brunt of the selling.
Before you dismiss this as an unfortunate coincidence, consider that hedge funds — particularly those of the passive investing variety — have come under fire over the past few years for continuing to pile into proven winners. That, in turn, has created stretched positions in the best-performing stocks, which has left them particularly vulnerable.
Now that the market’s pendulum is swinging back the other way, those same investors are being forced to sell out of positions. And much of that is due to the type of systematic programming found in quantitative funds.
As a result, stocks with the highest …read more
Source:: Business Insider