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Portfolio Rebalancing, Massive Bet Against Stocks Could Hurt Market In Coming Weeks

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Portfolio Rebalancing, Massive Bet Against Stocks Could Hurt Market In Coming Weeks

A combination of quarter-end portfolio rebalancing and a record-high number of bets against the market could spell trouble for stocks in the coming weeks.

Goldman Sach estimates as much as $76 billion could be moving out of stocks. He says, they may transfer into bonds at the end of the quarter. This can happen pensions, mutual funds and other large investors look to rebalance their portfolios. It may also take place as investors seek to reduce their exposure to stocks after a 21% rally this quarter.

A Downward Pressure

This massive selling could put downward pressure on stock prices in the coming weeks. This comes as large blocks of equities are indiscriminately sold out of portfolios.

“The end of the quarter is going to be pretty interesting, given how much the market has moved during this quarter. There could be volatility here. We already witnessed it and there’s potential for more, as we move toward the end of Q2,” Dan Deming, managing director at KKM Financial, says. He adds, “There’s a very high probability of window dressing and readjustment of positions.”

This quarterly rebalancing is on pace to be the largest in six years, according to Michael Schumacher, the director of rates strategy at Wells Fargo Bank.

“We estimate that U.S corporate pensions will move about $35 billion into fixed income. The reasons are pretty obvious. You had this massive rally in stocks and bonds haven’t been keeping pace,” says Schumacher.

Actions To Be Taken

JPMorgan projects pension funds will move $65 billion out of stocks and into bonds at the end of the quarter. Also, as much as $170 billion when you consider global stock markets.

The investment bank also believes that any drop in the market from the increased selling is a buying opportunity.

“While we acknowledge the risk of a small correction in equity markets over the coming two weeks as a result of this negative equity rebalancing flow, we continue to believe that we are in a strong bull market in equities and any dip would represent a buying opportunity,” said a JPMorgan analyst.

Should Investors Worry?

The market is also facing the headwind of a record number of bets. This is going against a continued climb after the 21% rally this quarter.

There has been a growing net-short position in the E-mini S&P 500 futures since April, and it is now the largest amount bet against the market since 2011.

That should be worrying for investors hoping the stock market will continue to rise.

Peter Boockvar, chief investment strategist at Bleakley Global Advisors, points to other instances where a large – and growing – bet against the market has preceded large corrections.

He says in September 2007, bets against the market were at a record high. This slightly preceded the market peak in October and subsequent fall.

He also says there was a record number of long positions in March 2009. This appeared just before the stock market started the historic bull-market run that just ended.

Boockvar also says anyone hoping that a record number of traders betting against the market could be a contrarian indicator that the rally will continue may be disappointed.

“I’m skeptical to look at this as a contrarian indicator. I’m going to argue that sometimes the shorts are right,” he said.

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