Despite recent rallies in U.S. equities, many hedge funds continue to abstain from the markets.
"Compared with the price of the Standard & Poor's 500 Index, managers' so-called net exposure is close to the lowest since June 2008," reports Bloomberg, using data from the International Strategy & Investment Group (ISI).
The S&P 500 has rallied 17% since October, restoring over $2 trillion to the value of U.S. equities -- but hedge funds aren't taking the bait. Is this wisdom or folly?
Volatility and exposure
Hedge funds aren't the only group of investors who have pulled back their investments -- individual investors have abandoned the market en mass.
It is understandable. Record volatility, U.S. political troubles, Europe's mounting sovereign debt crisis, China's potential for a hard landing, and disappointing emerging market data all fuel investor concerns.
Hedge funds don't seem to be any more confident. ISI's index or hedge fund exposure tracks net exposure on a scale of zero through 100. Readings toward zero indicate total short-selling, while readings at 100 indicate maximum bullish bets.
Today's reading is at 50, showing that these sophisticated investors are just as cautious, and maybe as sensible, as anyone else.
"It is unusual for hedge funds in our survey to remain as cautious on net exposure as they have, given the size of the move in stocks since the summer," Oscar Sloterbeck, managing director at New York-based ISI, said in an email to Bloomberg.
Steve Shafer, chief investment officer at Covenant Global Investors adds, "The problem is that the low exposure creates the potential for whipsaw, which hurt of lot of hedge funds last year. You get pounded in September, and then you miss out on October."
Business section: Investing ideas
Now that we know big money managers have missed out on several rallies, the question becomes: Will they now chase after high-momentum stocks?
If you think they will, the following list might interest you.
To create this list, we started with a universe of stocks in rally mode, trading above the 20-day, 50-day, and 200-day moving averages.
To further refine the quality of our list, we collected data on institutional money flows and identified 10 rallying stocks that have seen significant institutional selling during the last three months.
Big money managers have extensive resources to analyze investing ideas. So if they're dumping a certain stock, it's worth paying close attention.
Institutional investors have missed out on these rallies -- does that mean there's more good news to be priced in?
List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)
1. AMERIGROUP: Operates as a multi-state managed health care company. The stock is currently trading 12.20% above the 20-day SMA, 15.62% above the 50-day SMA, and 14.55% above the 200-day SMA. Net institutional sales in the current quarter at -3.4M shares, which represents about 7.45% of the company's float of 45.61M shares.
3. Health Net: Provides managed health care services through its health plans and government-sponsored managed care plans. The stock is currently trading 16.39% above the 20-day SMA, 19.49% above the 50-day SMA, and 22.55% above the 200-day SMA. Net institutional sales in the current quarter at -3.8M shares, which represents about 4.66% of the company's float of 81.52M shares.
4. Jazz Pharmaceuticals
5. JetBlue Airways
6. Lululemon Athletica
7. Momenta Pharmaceuticals
8. Privatebancorp: Operates as the holding company for The PrivateBank and Trust Company that provides business and personal financial services to middle-market companies and business owners, executives, entrepreneurs, and families in the United States. The stock is currently trading 20.05% above the 20-day SMA, 26.24% above the 50-day SMA, and 11.64% above the 200-day SMA. Net institutional sales in the current quarter at -2.1M shares, which represents about 3.53% of the company's float of 59.56M shares.
9. Scientific Games: Provides gaming solutions to lottery and gaming organizations worldwide. The stock is currently trading 21.77% above the 20-day SMA, 27.18% above the 50-day SMA, and 24.39% above the 200-day SMA. Net institutional sales in the current quarter at -3.9M shares, which represents about 20.21% of the company's float of 19.30M shares.
10. TrueBlue: Provides temporary employees for manual labor, light industrial, and skilled construction trades. The stock is currently trading 11.80% above the 20-day SMA, 16.74% above the 50-day SMA, and 11.88% above the 200-day SMA. Net institutional sales in the current quarter at -2.2M shares, which represents about 5.73% of the company's float of 38.37M shares.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Institutional data sourced from Fidelity. All other data sourced from Finviz