© Reuters.
BTIG Chief Market Technician released a new note to clients on Tuesday, focusing on the current state of key US stocks.
Titled after the Japanese proverb ‘hara hachi bun me’, which means ‘eat until you’re 80% full’, the note highlights that many important stocks, especially in sectors like semiconductors, mega-cap tech, and communication services, are “quite stretched,” analysts wrote.
“The ‘most important’ stocks for hedge funds, and for a lot of market participants for that matter, are about as extended on a daily basis as they have been over the last two decades,” analysts noted.
The analysis is centered on the GS Hedge Fund VIP Index, which, despite its strong performance, shows signs of being overbought. This is a financial index that tracks the stock positions most favored by hedge funds.
After closing higher for eight consecutive days on Monday, “the daily RSI for this index closed above 81 yesterday,” analysts say.
“Since we have data on this index (back to 2002), there have only been five other occurrences when daily RSI closed above 81. Those dates are: Jan. ’04, Jan. ’18, Dec. ’19, Jan. ’20, Sep. ’20,” they added.
Analysts also highlighted that although forward returns did not consistently signal immediate declines, in each case, subsequent weeks saw any initial gains in the index get fully reversed.
“As we enter the heart of EPS season along with a significant amount of macro, we would be cautious in chasing extended names here as the risk of an unwind, either during or after these events, remains quite high in our view,” analysts concluded.
