Historic selling pressure ahead: are pension funds and institutional investors taking profits?
Last week we saw nice gains in the indices, driven mainly by huge rallies in the chip sector.
Today, the market is slightly red, but nevertheless, the indices show immense strength compared to the very sensitive geopolitical situation.
And right now,
we are here to update you on why it might be wise to be cautious in the coming days?
Let's talk for a moment about pension funds,
Pension funds are about to make a significant 'rebalancing' move in their investment portfolios, which is expected to lead to massive stock sales worth approximately $25 billion over the coming month.
Note that this is the highest estimate for monthly sales not occurring at quarter-end since the early 2000s.
To understand the magnitude of the event, consider the following data:
The current amount is 25% higher than the previous monthly sales record, and it ranks among the 15 largest sales estimates Goldman Sachs has recorded in the last 25 years.
How extreme is this?
Typically, the average for such sales stands at just $1.8 billion.
The planned sale for this month is 12 times higher than the norm we know from the past.
Why is this happening?
When stocks in a pension portfolio rise in value beyond what was planned, the funds must sell them to return to the original ratio set between stocks and bonds,
and this is precisely what is creating the current selling pressure.
This situation is happening at perfect timing, as retail investors continue to enthusiastically pour money into the market, but large institutional bodies are already at very high exposure to stocks.
Therefore, the sale by pension funds could add a layer of pressure on a market that already feels very crowded and congested.
In fact, institutional investors have already started taking profits recently beneath the surface:
Last week, while indices set new records and we were all in euphoria...
Hedge funds made their largest cut in exposure to the US technology sector since July 2024.
This is the third largest weekly exit from the sector in the last five years.
The market exit was driven mainly by the sale of long-held stocks, and it was felt in almost every sub-sector, including software companies, chips, hardware, and communication equipment.
It seems they are simply choosing to take some money home after the market's historic run?
In addition to all this, companies' 'buyback window' is currently closed,
Hundreds of billions of dollars that were supposed to be used by companies to buy back their own shares (a move that supports the stock price) are waiting on the sidelines, which may affect liquidity and demand in the market over the next two weeks.
We are facing a very interesting week, where we will see if the rally and the fear of missing out on gains will manage to overcome the selling pressure and rebalancing by large entities?
And don't forget, a huge and likely volatile week lies ahead,
Over 2,100 companies are reporting this week, over 40% of the S&P500 are reporting this week!
And the highlight, 5 tech giants, 4 of whom are reporting on one day.
Meta, Microsoft, Google, and Amazon, on one day!
Also, the interest rate decision, the Fed meeting, and GDP data.
Have a good and successful week, everyone!