Thursday, October 16, 2008

Investor Bullish Sentiment Rises And Redemption Overhang

Individual investor bullish sentiment rose to 40.94% versus last week's reading of 31.47%. Equally impressive was the decline in bearish sentiment to 39.77% versus the prior week level of 60.84%. The bull/bear spread narrowed to -20% versus last week's spread of -29%.

(click graph for larger image)

Is it likely a large part of the market down draft is being driven by hedge fund redemptions? Dow Jones News Wire reports in an article today, Each Market Rally To Be Met By Wave Of Redemption Selling,
In its weekly flow report, TrimTabs Investment Research estimated hedge funds had a record $43 billion outflow in September alone, with flows into hedge funds down 56% for the first eight months of the year. In addition, redemptions for mutual funds this year have totaled about 12% of the total assets in each fund, well above the 8% TrimTabs had expected.

A report from JPMorgan estimated about $100 billion in redemption requests for funds of hedge funds in the fourth quarter, noting that $400 billion in overall position unwinding was likely over the coming year. In prior years, redemptions were well below fund inflows, but the tables started to turn late in 2007. In its most recent second-quarter report, said there was a total fund outflow of about $470 million for that quarter, while a Merrill Lynch survey found fund managers are holding more cash than they have in years.

This movement of money is essentially stamping out any significant stock market rally. Some traders saw rallies late last Friday, Monday and early Thursday as signs of a recovery in equities, but fund managers viewed them another way: Get out while you can. They're taking advantage of the modest gains to sell shares and thus satisfy investor redemptions. This has fueled big falls, including Wednesday's 733-point drop in the Dow Jones Industrial Average - the biggest one-day percentage drop since October 1987.

A flood of investor redemptions before Oct. 1 deadlines forced several funds to liquidate positions quickly, causing the wave of selling last week. Funds typically have until the end of the year to pay, but many were inundated with more requests than expected, so quickly sold to raise a cash buffer.
When the selling pressure from hedge funds subsides, the cash sitting on the sidelines could find its way into the equity markets pretty quickly.


Each Market Rally To Be Met By Wave Of Redemption Selling
Dow Jones Newswire via
By: Geoffrey Rogow and Joseph Checkler
October 16, 2008

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