The balance of power between the bulls and bears in the US stock market has suddenly reversed! Hedge funds are entering the scene at the fastest pace in two years.

According to the latest report released by Goldman Sachs, hedge funds have been pouring into the US stock market at the fastest pace in two years. This is because market participants generally expect that the current interest rate hike cycle by the Federal Reserve has come to an end. Hedge funds have been investing their funds into US stocks that were previously undergoing adjustments, leading to a significant rebound in the US stock market in early November. According to a recent report from Goldman Sachs' bulk brokerage trading department, hedge funds globally bought stocks in the US stock market on a large scale in the week ending November 3, marking the largest five-day buying spree since December 2021.

Goldman Sachs stated in the report that this has put some cautious hedge fund traders in a dilemma, as the rising stock prices have made their previous short positions too expensive to maintain. Many traders found themselves in trouble when trying to exit crowded short trades, resulting in rapid losses in their investment portfolios. The expectation of further stock price increases has led to long positions, while the shorts hope for a decline in stock prices.

As of last Friday, US stocks have experienced five consecutive trading days of gains and achieved the best weekly gain in a year. The upward trend continued on Monday, with all three major indices closing higher. The S&P 500 index has seen five consecutive trading days of gains, while the Nasdaq index has seen six consecutive trading days of gains, marking the largest weekly percentage gain since 2023.

Goldman Sachs stated that hedge funds' long positions in the US information technology sector have reached the highest level in eight months. Data shows that, including speculators, long positions in US stocks tend to focus on large technology companies, including software-based technology companies. The report also mentioned that they are optimistic about non-essential consumer goods companies such as restaurants and fashion, whose products and services are popular but not essential.

Goldman Sachs also reported that healthcare and financial stocks have been net sold. In terms of regional fund flows, Goldman Sachs stated that the largest US stock hedge fund buying power is concentrated in North America, while buying power in Europe and Asia (excluding Japan) is affected by net short positions.

After experiencing a wave of valuation cuts, will US stocks see a wave of gains?

The recent wave of sell-offs has significantly lowered the overall valuations of large technology companies. However, valuations are still relatively high, and some cautious investors seem reluctant to buy these stocks due to uncertainties about future earnings expansion. According to data compiled by institutions, the average expected price-to-earnings ratio of the "Big Seven Tech Giants" in the S&P 500 Index is about 31 times, which is nearly twice the overall expected price-to-earnings ratio of the other 493 constituent stocks in the index.

In the view of Keith Lerner, Chief Market Strategist at Truist Advisory Services, the performance pressure faced by large technology companies indicates that the adjustment period of the S&P 500 index is nearing its end, laying a solid foundation for outstanding performance in the last two months of the year. Historical data shows that these two months are often the best performing period for the US stock market.

"We are currently in a favorable market seasonality period, with stabilized interest rates and mixed economic data. There is also optimistic news in the field of artificial intelligence, which is an important force driving the rebound of the US stock market," he said. "Some investors have underperformed in terms of profitability, partly because they missed the rise of large technology stocks earlier this year. I believe we may see some investors chasing technology stocks towards the end of the year due to concerns about falling behind in profitability."

According to statistics from LPL Financial, November has been the month with the highest average return for US stocks since 1950, and November to December are the two months with the highest average return. Just before the rebound in November, the US stock market experienced a dismal September, which has historically been the worst performing month for US stocks. So far this year, these seasonal patterns have worked perfectly, with the S&P 500 index falling nearly 5% in September and over 2% in October, but rising more than 4% in the first few days of November.

Capital Group, a giant asset management firm overseeing $2.3 trillion in assets, believes that the Federal Reserve's decision to maintain interest rates and its indication that its aggressive tightening cycle is over has created an opportunity for investors to buy global stocks. Winnie Kwan, a portfolio manager at the company, said that after interest rates peak, "the differentiation between asset classes, cash, fixed income, and stocks will be most significant." According to Capital Group's analysis of the past four tightening cycles, the average global stock market return in US dollars exceeded 12% in the 12 months after the last rate hike by the Federal Reserve. In comparison, the return rate for global bonds was about 6%, and for cash, it was about 4%.

Michael Hartnett, a strategist at Bank of America and known as "Wall Street's most accurate strategist," recently stated in a report that the technical aspect is no longer hindering a year-end rebound in the S&P 500 index, but there is still uncertainty in the medium to long term for the US stock market. Hartnett said that due to the market being overly bearish, the contrarian buy signal for risk assets has been triggered, and based on historical experience, bullish forces are actually brewing when the market is extremely pessimistic.

According to Hartnett's strategy team, the timing for a tactical rebound in the US stock market may be before the end of the year. Currently, Bank of America's three indicators suggest a "contrarian buy" signal: the Bank of America Bull & Bear Indicator at 1.4 (below 2%); the cash level in the Bank of America Global Fund Manager Survey (FMS) is around 5.5% (above 5%); and the redemption of assets under management at Bank of America in the past few weeks is 1.1% (above 1%).