LIVE MARKETS-Mutual vs hedge: Fund-amental similarities and differences

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* Major U.S. indexes green; Nasdaq out front

* Cons disc leads S&P sector gainers; financials weakest

* Euro STOXX 600 index closes ~flat

* Dollar ~flat; crude gains; gold, bitcoin fall

* U.S. 10-Year Treasury yield ~1.29%

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(1215 EDT/1615 GMT)

Lashing assets together into funds, like logs in a raft,
enables investors to spread the risk and focus on broader

Goldman Sachs’ most recent Weekly Kickstart note examines
the similarities and differences of mutual funds and hedge funds
amid what David Kostin, Goldman’s chief equity strategist, calls
“a challenging stock picking environment” owing to “recent macro
uncertainty and compressed return dispersion.”

The mutual/hedge fund venn diagram overlaps in their heavy
allocation toward equities. Mutual fund cash allocation as a
percentage of assets under management (AUM) has dropped to a
record low 1.6%, the note says, while gross leverage among hedge
funds is elevated – in the 92nd percentile since 2016 – and
short interest is near record lows.

Among their differences is their preferences for growth
versus value stocks. “Hedge funds broadly favor Growth while
mutual funds broadly favor Value,” Kostin writes, noting that
growth outweighs value in hedge funds by 8 percentage points and
the average large-cap mutual fund is underweight growth by 299
basis points and overweight value by 92 bps.

And while “hedge funds and mutual funds generally carry
directionally similar sector tilts…there are a few exceptions
this quarter,” as they disagree on financials and energy
. At the beginning of the third quarter, mutual funds
were overweight financials while hedge funds were underweight
the sector. Likewise, hedge fund allocations to energy are at a
ten-year low while overweight energy ratings in the mutual fund
space are at their highest “since at least 2012.”

Additionally, while both increased their tech
positions in the second quarter, they continue to disagree on
the FAAMG group of stocks (Facebook, Apple,, Microsoft and Alphabet).
The group constitute the top five long positions among hedge
funds, but “in contrast, all 5 FAAMG names appeared in our
mutual fund underweight screen, driven in part by their high
concentration in benchmarks,” says Kostin.

Hedge funds and mutual funds do have nine “shared
favorites,” the note says. They include Adobe, Fiserv
, General Motors, Liberty Broadband,
Mastercard, Square, Twilio, Visa
and Wells Fargo.

But these “shared favorites” have well underperformed the
S&P 500 year-to-date, gaining 6% versus the SPX’s 20% advance,
notes Kostin, who adds that shared favorites have a good
historical record, having outperformed the SPX in 62% of the
months since 2013.

The graphic below, courtesy of Goldman Sachs, show sector
tilts of large-cap mutual funds versus hedge funds:

(Stephen Culp)


BMO (1138 EDT/1538 GMT)

Foreign buyers have been increasing their purchases of U.S.
Treasuries even as yields hold at historically low levels, and
this demand may limit how far yields may rise, analysts at BMO
Capital Markets said.

The Treasury saw surprisingly strong demand for a $41
billion sale of 10-year notes earlier this month, which sold
more than three basis points below where they had traded before
the auction.

In that auction, 38% of the issue went to buyers abroad,
which is the largest share since March 2011, BMO said.

“This highlights a meaningful contributing factor to the
current trading zone in a much lower outright yield territory
than would otherwise be expected. The divergent economic
recoveries around the world as well as a low global rate
environment has translated to a solid base of demand from
foreign market participants” the analysts said in a report sent
on Friday.

The benchmark 10-year note yield has held at stubbornly low
levels even as expectations grow that the Federal Reserve is
nearing a taper of its bond purchase program as the economy
recovers. The yield is at 1.29% on Monday and has
dropped from a one-year high of 1.78% reached in March.

“While overseas bidding alone may not drive another bullish
repricing below 1%, it will limit how far yields can back up as
the bar for a dip to be considered buy-worthy has been lowered,”
BMO said.

(Karen Brettell)



Everything seemed to be going so nicely for the housing
market, when along comes a disappointing Pending Home Sales
report to rain on our parade.

In recent months the housing sector had become a victim of
its own success. A mad rush for the suburbs in search of elbow
room and home office space sent inventories to record lows and
launched home prices beyond the reach of many potential home

But while demand remains elevated and prices hover in the
stratosphere, inventories have begun to recover and the sector
appears to be approaching its pre-COVID equanimity.

Or so it would seem, given the surprise recent uptick in new
and existing home sales and mortgage data showing a tentative
increase of applications for loans to purchase homes.

But pending sales of pre-owned U.S. homes, which
is based on contract signings, and is among the most
forward-looking housing indicators, unexpectedly dropped by 1.8%
in July, according to the National Association of Realtors

The number rudely contradicted the 0.4% consensus gain, and
extends the previous month’s downwardly-revised 2% drop.

Year-over-year, sales contract signings of existing homes
are down 8.5%.

And once again, tight inventories would appear to be the

“At the moment there is not enough supply to match the
demand from would-be buyers,” writes Lawrence Yun, chief
economist at NAR. “That said, inventory is slowly increasing and
home shoppers should begin to see more options in the coming

Rubeela Farooqi, chief U.S. economist at High Frequency
Economics, would concur.

“Home sales have moderated overall since a pandemic-induced
surge in demand,” Farooqi says. “High prices that are seeing a
lift from low inventories should ease as supply constraints

“Even so, affordability concerns in the near term will
likely temper sales over coming months,” she adds.

It should be noted – as evidenced by the graphic below – the
pending home sales index is now essentially inline with
pre-pandemic levels:

While pending home sales is among the more forward-looking
housing market indicators, the stock market looks even deeper
into the crystal ball as investors bet on conditions six months
to a year in the future.

And although through much of the health crisis, housing and
homebuilding stocks largely outperformed the broader market, by
mid-May the sector came back to earth.

The graphic below shows the 12-month performance of the
Philadelphia SE Housing index, the S&P 1500 Home Building
index, and the S&P 500. The three are now
essentially neck-and-neck, having advanced around 30% in the
last year:

Wall Street is taking additional steps on its slow but
steady march through successive record highs in morning trading.

The three major U.S. stock indexes are varying shades of
green, with market-leading tech shares putting the Nasdaq out

(Stephen Culp)


– BOFA (1035 EDT/1435 GMT)

Oil prices are likely to increase after the commodity last
week rebounded from a three-month low and formed a bullish
engulfing candle, according to Paul Ciana, a technical
strategist at Bank of America.

U.S. crude fell as low as $61.74 last week before
turning around and ending the week higher at $68.74, and
producing “a bullish reversal week,” Ciana said in a report sent
on Sunday. It traded at $68.37 on Monday.

The bank studied all previous signals since 1990 and found
that prices were higher eight weeks after forming a bullish
engulfing pattern in 16 out of 22 cases when prices were also
trading above the 200-week simple moving average.

If oil prices retrace a third to a half of last week’s rally
in the coming one-to-three weeks, which would take crude to
around $66.25 to $65.40, Ciana said it would be a buying
opportunity. He noted, however, that crude must stay above last
week’s low of $61.74.

Crude is also facing resistance at the $70 to $71 area and
breaking above this would increase the case for a further rally,
Ciana said.

(Karen Brettell)


EDT/1419 GMT)

The S&P 500 and Nasdaq hit fresh all-time
highs on Monday as dovish remarks from the Federal Reserve last
week bolstered optimism in an economic rebound and eased fears
of a sudden tapering in monetary stimulus.

Tech titans are leading the way higher with Apple
and Microsoft providing the biggest boosts to the S&P
500. Meanwhile, more economically sensitive sectors are lagging.

With this, the U.S. 10-Year Treasury yield is
dipping back to the 1.30% area, and growth is
outperforming value. In fact, the IGX/IVX ratio is
hitting its highest level since early-November 2020.

Here is where markets stand in early trade:

(Terence Gabriel)



The Nasdaq Composite posted a record-high daily and
weekly closes on Friday. And now, Nasdaq 100 e-mini futures
are suggesting further gains at open Monday.

With this, however, the Composite, on a weekly basis, may
not be able to stretch much more above its 200-week moving
average (WMA) before it comes up lame, and stumbles:

In mid-February, the Composite ended Friday 69.9% above its
200-WMA. This was its greatest level of disparity vs this
long-term moving average since September 2000.

Since then, and despite higher IXIC highs, amid a slowing
rate-of-ascent, the disparity has waned. This measure peaked in
mid-April at 62.9% before posting double-highs at a Fibonacci
61.8% in early and later July.

The Composite closed Friday 61.4% above its 200-WMA. With
the moving average poised to potentially rise a little more than
40 points or so this week to around 9,418, a another push to
challenge a 61.8% disparity reading would put the Composite
around 15,238, or just 0.7% above Friday’s 15,129.501 close.

Of note, when the Composite topped on a weekly basis in
late-August 2018, there had been a period of 200-WMA disparity
divergence. Additionally, disparity stalled in early 2020 shy of
its 2018 tops ahead of the February/March IXIC collapse.
Therefore, another disparity down-tick may suggest the Composite
has already stretched about as far as it can for now.

A weekly disparity close above 61.8%, however, may suggest
the Composite can extend again to challenge the 69.9%
mid-February reading. In that event, depending on the speed of
the advance, the IXIC could potentially tack on more than 6%,
while pushing over 16,000.

(Terence Gabriel)



(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)

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