We wanted to share a timely update on current market dynamics and how they’re shaping our portfolio strategy.
Market Overview: Strength at the Surface
The S&P 500 continues to climb, reversing early losses and approaching the key 6000 resistance level. With momentum indicators like RSI in overbought territory, a breakout could spark renewed speculation about new all-time highs. First support is seen near 5800 (futures).
Under the Hood: Diverging Sentiment
Despite strong index performance—Nasdaq +7.1%, S&P +5.0%, Russell 2K +6.0% (May 6–13)—hedge funds have been aggressively shorting the rally:
- $11.1B in new shorts vs. $4.2B in long buying = $6.9B net reduction in exposure.
- Hedge fund shorts now represent 41% of total open interest—the highest since February 2021.
- From May 13–19, Nasdaq gained another 1.2%, while funding richened by 12bps and traded at a premium to the S&P.
This suggests a sharp divergence: institutional “smart money” is shorting into strength, while retail investors are buying dips at a record pace. Whether this reflects confidence or complacency remains to be seen—especially as consumer confidence remains fragile.
Macro Watch: Bond Market Stress Signals
We’re also closely monitoring the long end of the bond market, where several structural concerns are converging:
- US fiscal spending is up +7% YoY.
- Treasury issuance remains elevated.
- Systematic funds have turned sellers.
- Debt sustainability concerns are resurfacing.
- The U.S. has lost all primary AAA credit ratings.
These dynamics echo the “fever peaks” of Q4 2023 and may have implications for both equity and fixed income allocations.
Portfolio Strategy: Poised for Re-Entry
Our current strategy remains on the sidelines, but we are very close to re-entry. If triggered, we will only re-enter positions currently listed as held in the portfolio—no new names will be added at this stage.
We are also maintaining our beta management discipline:
- Upon re-entry, we will deploy only 40% of the existing position weight.
- This allocation will remain in place until the next scheduled rebalancing period.
This approach reflects our cautious optimism: we respect the market’s momentum, but remain mindful of the risks building beneath the surface.
Bottom Line
- Equities are strong, but positioning and macro risks are diverging.
- Hedge funds are heavily short, even as prices rise—a potential powder keg.
- Retail is buying dips aggressively, but sentiment may not be as solid as it seems.
- Our portfolio is poised for re-entry, but with controlled exposure and strict discipline.
If you have any questions or would like to discuss how this impacts your portfolio, please don’t hesitate to reach out.
Warm regards,
David Yelle
CIO & Portfolio Manager
White Rock Capital Management
