"Smart Money Seizes U.S. Stock Market Dip as Volatility Peaks"

Last week, the U.S. stock market experienced a slight net buying trend, not significantly offset by short selling. Among the 11 industry sectors of the U.S. market, nine were net bought, with technology and finance leading the pack.
Amid fears such as "Black Monday" and "roller coaster" behavior in U.S. stocks, smart money took advantage of the downturn to actively buy on the dips last week.

On August 12, financial and market sentiment blogs noticed a shift in hedge funds' market sentiment. Last week, while retail investors and CTAs (Commodity Trading Advisors) panic-sold stocks, smart money aggressively bought the dip, re-entering U.S. tech stocks and high-quality stocks.

After being net sold for eight consecutive weeks, U.S. stocks showed a slight net buying trend last week. In 11 sectors, technology, information technology, consumer staples, industrials, communication services, and financials topped the net buying, while consumer discretionary and real estate sectors were net sold.

During the recent market pullback, hedge funds bottomed out on high-quality stocks. The components of the U.S. High-Quality Long-Index (GSXUMFQL) showed net buying for the third consecutive week. Last week's nominal net buy volume was the largest since March 2023, driven primarily by long-term money, followed by short-covering, with a buy ratio of approximately 2.5 to 1.

Regarding risk exposure, the proportion of U.S. stock market bulls is rising. Data shows the total leverage ratio of U.S. fundamental long/short positions increased by 0.9 percentage points to 190.4%, while the net leverage ratio rose by 1.1 percentage points to 52.6%.

Last week, the U.S. stock market saw a "roller coaster" week, marking the most volatile week so far this year. The S&P 500 index plummeted nearly 4% on "Black Monday," the biggest drop since September 2022. However, the market recovered most of its losses by the end of the week as recession concerns eased. For instance, the S&P 500, Dow Jones, and Nasdaq saw small cumulative declines of 0.04%, 0.6%, and 0.18%, respectively.

Market trends early last week were primarily driven by asset managers and quant traders rotating funds in global stock markets, particularly in macro products and cyclical assets like semiconductors. Many investors adopted a risk-averse stance, moving significant funds into money market funds, which reached a record high of $6.19 trillion.

As market volatility subsided, funds gradually shifted to defensive sectors such as healthcare and information technology, and later in the week, returned to previously sold high-quality stocks and profit-rich equities. By the week's end, asset managers' buy/sell preferences balanced out, while hedge funds showed a net inflow of about $1.5 billion.

The past 40 years show that buying the S&P 500 after a 5% drop is usually profitable. A strategy team noted that since 1980, buying the index at 5% below its recent highs typically yields a median 6% return over the next three months.

After a turbulent week, market observers are also re-evaluating AI stocks. Despite fatigue around AI concepts, high-quality AI stocks remain attractive due to their strong technology foundations, market positions, or growth potential.