ATFX - Has the market sentiment changed? The bulls and bears are in a massive "retreat"!

atfx- Specialist fund managers who are both long and short stocks trimmed their bullish and bearish positions last week, a so-called sell-off, according to data compiled by JPMorgan's prime brokerage division.The frenzy of repositioning has been so frenzied that it has reached its highest level since retail investors instigated a short squeeze in 2021.

Morgan Stanley's hedge fund clients have shown a similar, albeit slower, pattern of risk reduction, selling their holdings this week to a new high this year. Goldman Sachs' hedge fund clients have trimmed their positions in US stocks on 12 of the past 14 trading days.

The decline in U.S. stock holdings could mark a shift in market sentiment.At the beginning of 2023, almost everyone was on the defensive, and since then they have been forced to adjust to the rise in U.S. stocks. The S & P 500 has risen 28% since October, and is only about 200 points away from fully returning to its pre-2022 bear market highs.

The JPMorgan team, which includes John Schlegel, wrote in a report that "while the stock market rally may be good for those who are long the market, it is quite challenging for high-frequency bears, and the U.S. rally appears to be triggering widespread capitulation in the form of underweight holdings."

ATFX - For hedge funds shorting stocks, the blow from the rise in U.S. stocks has become increasingly unbearable. Goldman Sachs data shows,As of July 28, long-short hedge funds had nine consecutive days of negative alpha returns (negative alpha indicates that the return of the portfolio is lower than the benchmark index), the longest stretch since January 2017The company's managing director, Scott Rubner, who has studied capital flows for two decades, attributes it to bad bets on the short side and deteriorating performance on the long side

Fund managers are both scared and terrified

It is the latest pain to come from a stock market rally in 2023. Instead of falling, as most forecasters predicted, US stocks soared as the economy weathered the Federal Reserve's aggressive anti-inflation campaign. In the process, fund managers were forced to cover shorts and chase gains, while strategists scrambled to raise the year-end price target for the S & P 500.

All the negative sentiment at the end of last year set the stage for today's strong rally in U.S. stocks.Now everyone is wondering whether the pendulum of market sentiment has swung to the other extremeIn the face of economic and policy uncertainty, investors' positions have been better able to predict the direction of the market for most of this year

Morgan Stanley's sales and trading team, which includes Christopher Metli, said:A batch of early bulls may run out of ammunitionTheir estimates show that hedge funds that allocate their assets based on volatility or trend signals have snapped up stocks, causing their net leverage to be above 80% for the past five years

As the risk exposure increased, Mettley and his colleagues concluded,If the U.S. stock market goes into turmoil, systemic macro fund managers will face the risk of turning into big sellersAlthough they expect global net equity flows to be flat in the coming daysA 5% one-day drop in the S & P 500 could lead to a $180 billion sell-off in stocks in the coming week.

Caution about US stocks lingers, with net hedge fund exposure slipping to 47 per cent from 49 per cent last week, according to Morgan Stanley clients, as they continue to take profits from recent gains in stocks such as software.

Eric Boucher, co-head of sales at Renaissance Macro Research LLC, found similar sentiments.

"I've been to a lot of summer luncheons and the conclusion is that people are still not ready for a bull market," he said. "They are still concerned about the macro situation"For example, if the economy loses steam, there could be a wave of bond defaults."

Retail investors dispatched after hearing the wind

That being said,The prosperity of US stocks has attracted many investors to join them.Retail investors are back in love with Meme shares. Options traders are flocking to buy bullish contracts to profit from them. In a poll by the National Association of Active Investment Managers (NAAIM),Equity exposure has just risen to its highest level since November 2021.

However, given the seasonally weak market in August and the upward trend in 10-year Treasury yields, Rubner told clientsEither re-increase short positions or hedge downwards."While I continue to be bullish on equities, I am actually pessimistic about August and expect a small correction in equities in August," he wrote in a note. "It is important to emphasize that my core view remains that I am no longer in the company of any'macro 'bears. Positions and market sentiment are no longer pessimistic, but optimistic."