Long-only funds are buying stocks while hedge funds keep selling

Investing.com — Long-only managers continued buying last week, with all sectors witnessing net inflows, Citi revealed in a Wednesday note.

The largest increases in exposure were seen in technology, real estate, and financials, while materials, industrials, and energy saw the smallest inflows.

Hedge funds, on the other hand, were net sellers during the same period, though the activity was mixed.

Health care, consumer staples, and technology were the most bought, while outflows were concentrated in consumer discretionary and financials.

“Financials and real estate replace consumer discretionary and industrials in the top bucket this week; Materials moves into the bottom 3 replacing communications,” Citi highlighted in the note.

Strategists also point out that market internals as of last Friday indicate that pricing reflects expectations of a soft landing.

In mid-August, the bank observed that the “stagflation” and “goldilocks” correlations, where tech tends to dominate, appeared to be bottoming out. This trend has since materialized, with both correlations rising from their early August lows, while the “overheat” correlation—where utilities and energy typically outperform—has declined.

Recently, there has been a notable increase in “late recession” and “soft landing” correlations.

Earlier this year, these themes showed positive correlations, though the goldilocks and stagflation correlations were dominant, driven by tech outperformance. Now, the soft landing scenario is aligning with a broader market performance.

“We think it is likely that either the soft landing correlation falls back out of favor or tech can make a comeback and meet the soft landing correlation,” Citi’s team wrote.

However, given the weaker price action observed this week, they suggest the soft landing correlation may be losing momentum, though upcoming catalysts could still influence the outcome.