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What is driving the markets?

According to latest Q2 SEC 13F filings, institutional investors (hedge funds, pension funds and endowments and banks) increased their positions in 4 out of 10 S&P economic sectors, namely energy, material, information technology and utilities. Most notably, the 3.0% energy sector incremental increase over the 1st quarter, and significantly underweight in financial and consumer discretionary (see the chart "% weighting changes from 1st Q" on the right panel.) The dramatic market sell-off we experienced lately, especially last two sessions, caught many people by surprise, especially the pounding on technology sector and small cap sectors.

If we compare the institutional investors' holdings and sector performance, we would not have much difficulties to find that current market behavior may be largely driven by the asset allocations and "locking-in" gain on the 1st half's best performers, namely energy, materials and technology. As the chart on the left shows that energy and material sectors performed the best, especially energy as everybody witnessed in the 1st six months this year . Immediately entering the 3rd calendar quarter, the physical commodities markets start to crumble, and also equity markets. From the chart on the left, we can see that the best performance of four sectors in the first six months, i.e., energy, material, technology and utilities switched the positions with the worst four sectors (financial, consumer discretionary, staples and health care) in last two months. The speeds of market declines in the last few days seems to suggest that "big guys" were rushing to the emergency exits. And the rumors of hedge funds liquidated positions certainly added fuel to fire.


data source: Bloomberg

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