What is smart money doing after a big drop? Bottom fishing!

People fear me for being greedy! Last week, during the "Black Monday" and the "roller coaster of US stocks", smart money took advantage of the decline and actively bought on dips.

On August 12th local time, financial blog Zerohedge noticed that hedge funds' market sentiment is changing. While retail investors and CTAs (commodity trading advisors) were panic selling stocks last week, smart money was aggressively buying the dip, re-entering US tech stocks and high-quality stocks.

After 8 consecutive weeks of net selling, last week the overall US stock market showed a slight net buying trend, not offset by a large amount of short selling. Among the 11 industry sectors in the US stock market, 9 sectors were net bought. Specifically, the technology & information technology, consumer staples, industrials, communication services, and financial sectors were net bought, while non-essential consumer goods and real estate sectors were net sold.

During the recent market pullback, hedge funds were buying high-quality stocks. The components of the US high-quality long-term stock basket (GSXUMFQL) have seen net buying in the past three weeks, with last week's nominal net buying volume being the largest since March 2023, mainly driven by long-term fund buying, followed by short covering, with a buying ratio of about 2.5 to 1.

In terms of risk exposure, the long position ratio in the US stock market is rising. Data shows that the US basic long/short leverage ratio increased by 0.9 percentage points to 190.4%, the US basic long/short net leverage ratio increased by 1.1 percentage points to 52.6%, and the US basic long/short ratio increased by 1.0% to 1.763.

Funds Attacking High-Quality Stocks, Goldman Sachs: Significant Returns from Buying the Dip After S&P 500 Falls 5%

Last week (August 5th to August 9th), US stocks experienced a "roller coaster" market, the most volatile week of the year. The S&P 500 index plunged nearly 4% on "Black Monday," marking the largest drop since September 1997. However, with factors such as employment data easing recession concerns, US stocks basically recovered the weekly decline by last Friday. Specifically, this week the S&P 500, Dow, and Nasdaq fell slightly by 0.04%, 0.6%, and 0.18% respectively.

Goldman Sachs trader Matthew Kaplan analyzed that the earlier market price movements last week mainly reflected asset managers and quantitative traders rotating funds in global stock markets, especially in macro products and cyclical assets such as semiconductors. Market risk aversion was evident, with a large amount of funds flowing into money market funds, whose assets reached a record high of $6.19 trillion, **indicating that a large amount of cash is still waiting off-market to re-enter However, as market volatility subsides, funds are gradually shifting towards defensive sectors such as healthcare and information technology, and in the latter part of last week, they are returning to high-quality stocks and stocks with strong financial performance that were previously sold off. In the end, the buying and selling preferences of asset managers (LOs) remained relatively balanced, while hedge funds (HFs) net bought around $1.5 billion.

Matthew Kaplan stated that last week was one of the busiest summer weeks in the past five years, with the U.S. market experiencing about a 4.4% volatility after the sell-off on Monday. Despite various unfavorable factors at the beginning of last week, such as the sharp unwinding of yen carry trades, as macro data and corporate earnings gradually alleviated panic, the S&P 500 index ultimately closed flat for the week.

Goldman Sachs strategists also pointed out that buying after a 5% decline in the S&P 500 index over the past 40 years has usually been profitable. The team led by David Kostin stated that since 1980, if investors buy the index at a price 5% lower than the recent high, the median return over the next three months would be 6%.

After a week of ups and downs, Goldman Sachs also re-evaluated AI stocks. Goldman Sachs pointed out that even though the market may be weary of AI concept stocks, high-quality AI stocks still remain attractive, as these companies have strong technological foundations, market positions, or growth potential in the field of AI