After 8 weeks of sell-off, US hedge funds bought stocks at the fastest rate since 2021.

On Monday, October 14, financial blogger Tyler Durden posted an article saying that the trading volume of US hedge funds and the overall stock market has risen sharply recently. The US stock market is experiencing active purchases and market growth, but the market's overvaluation is a worrying issue and may trigger future adjustments.

According to Goldman Sachs Prime Brokerage (main brokerage business) data, the net purchase volume of individual stocks by hedge funds was the largest since December 2021. Of the 11 sectors, 7 were net bought this week. In nominal terms, the healthcare, finance, industrial and information technology sectors led the way. Fund managers made net purchases of US healthcare stocks for the third week in a row, the fastest rate in more than a year.

For most of the second half of this year, especially since the collapse of arbitrage trading in August, US stocks seemed to have overcome many concerns and continued to rise — on Friday, the S&P 500 reached its 45th all-time high of the year and the best performance of the 21st century.

The trading volume of the US stock market has soared, and high valuations are worrying

According to Goldman Sachs Prime Brokerage data, after 8 consecutive weeks of sell-off, the hedge fund's net purchase rate of US stocks hit the fastest record in 4 months. This was mainly driven by individual stocks. Net purchases of individual stocks reached the highest level since December 2021. The ratio of long purchases to short compensation was 1.2 to 1.

However, under this frenzied buying wave, the overall investment level of hedge funds is still relatively low. The total leverage ratio of US fundamental long and short funds only increased 0.2 percentage points to 192.4%; the net leverage ratio increased 1.3 percentage points to only 53.5%; while the long and short ratio increased 1.5 percentage points to 1.777.

Looking at Goldman Sachs stock sales and trading department data, the buying volume is even more obvious. Goldman Sachs trader Matt Kaplan pointed out that thanks to moderate PPI data offsetting the impact of the rise in CPI, the market rose widely last week when the S&P 500 index reached a new high, and weighted indices such as the S&P 500 performed better than weighted indices by about 40 basis points.Russell IndexIt was up 2%.

Amidst numerous transactions and high valuations in the US stock market, Kaplan said:

“The only thing that continues to be debated in a bear market is overvaluation.”

Durden thinks this is understandable, because even Goldman Sachs analyst David Kostin admits that the current forward-looking price-earnings ratio of US stocks has reached a “ridiculous” level of 22 times!

The net rate of hedge fund purchases of US stocks hit the fastest record in 4 months

Here are Goldman Sachs Prime Brokerage's detailed statistics on the US stock market last week:

Net sales of macroeconomic products such as indices and ETFs were mainly driven by short sales. Short positions in US-listed ETFs increased by 1.3%, mainly in large-cap stocks and corporate bond ETFs.

Net purchases of individual stocks were the largest since December 2021, mainly driven by long buys and short buybacks. Of the 11 sectors, 7 were net bought this week. In nominal terms, healthcare, finance, industry, and information technology sectors led the way, while high-dividend yield sectors such as real estate, utilities, and consumer necessities were all net sold.

The IT sector performed the best this week, with net purchases also at the top, mainly driven by long buys, with slightly less compensation from bears. The software industry and the technology hardware industry made the most net purchases, while the semiconductor and equipment industry made the most net sales. Despite recent increases in buying volume, net positions in US software stocks are still low.

Fund managers made net purchases of US healthcare stocks for the third week in a row, at the fastest rate in more than a year, mainly driven by long buys and short buybacks.

All sub-sectors received net purchases this week, leading biotech, pharmaceutical and medical service providers and service industries. The overall long/short ratio for pharmaceuticals, biotech and life sciences stocks is now 2.70, the highest level since May, although still at the low of the 12th percentile in a five-year review.