Hedge funds have made a huge push into risky assets. Here's what that means.

By Barbara Kollmeyer

Critical information for the U.S. trading day

Tuesday's pop for stocks after some grim job opening data helped the S&P 500 and other indexes trim August losses, though landing in the green for the month may be still be a long shot.

For those investors who have found this summer tough going, a team at UBS led by chief investment officer Mark Haefele offer validation. They say markets have being pulled in opposing directions "netting to no clear direction overall." That's as lots of big simple questions have no answers right now, such as how strong is the consumer and are investors selling rallies or buying dips?

Haefele says positioning suggests investors are only back to neutral on stocks, and with the S&P 500 SPX only off 3.4% from its recent peak, there's "hardly a large dip to buy after a strong rally."

Onto our call of the day from Société Générale, which flags a risk indicator tracking hedge funds that is "increasingly risk-on."

As SG's strategist Arthur van Slooten and head of global asset allocation Alain Bokobza note, hedge fund positions, whether long or short, are worth watching as they can shed light on financial market trends.

"After a nice summer break, we discover that hedge funds have continued to adjustpositions upward and are now clearly risk-on," they say.

They illustrate that via their Multi Asset Risk Indicator -- SG MARI, which qualifies hedge fund positions as risk on or risk off -- now at its highest level of 1.52 since summer 2018, when it saw a peak of 2.76. "The current peak has been almost 13 months in the making. During this period, SG Mari has increased by 2.7 points, ranking the episode among the top four strongest recoveries since 2005," say the strategists, offering the below chart:

Van Slooten and Bokobza say fortunately, the current level of their risk indicator MARI is "still comfortably below the zone that indicates investor exuberance," which would be a level of 2 or above.

"That said, even though it is still some way from that danger zone, most surges in SG MARI (see shaded areas on the above chart) have been followed by significant drops (see arrows on the chart) in the indicator," they say. So, think hedge funds having piled into stocks and other assets, backing out in a big way.

In May, the strategists noted inconsistency of hedge fund positioning in bonds and equity. Since that time, shorts on stocks to hedge against a recession have largely been neutralized.

"So, recession fears seem to have been ditched for now, potentially at a rather unfortunate moment," say the pair.

Last word goes to wish a happy 93rd birthday to Warren Buffett. Long may one of the world's most followed investors reign.

Read:Want to diversify your stock-market investments away from top-heavy indexes? Here's another easy way

The markets

U.S. stocks DJIA opened slightly higher after growth data was downwardly revised, while the 10-year Treasury yield BX:TMUBMUSD10Y turned flat at 4.116%. A bitcoin rally has cooled, following Grayscale Investments' court win

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

Data darkening? Revised second-quarter GDP was revised to 2.1% from 2.4%, while the U.S. private sector added just 177,000 jobs in August, the lowest number since March 2022. Pending-home sales are still to come at 10 a.m.

Brown-Forman stock (BFA) is down over 4% after the Jack Daniel's parent reported surprisingly weak profit and sales

Reporting late Tuesday, HP (HPQ) shares are down 8% after reporting a third-straight revenue miss and warning of a challenged economy.

Box (BOX) stock is down 9% after the applications developer earnings that barely beat forecasts and weak guidance. Video-chip maker Ambarella (AMBA) is down 19% on a disappointing forecast

After the close, cloud-based software group Salesforce (CRM) will report.

Hurricane Idalia, which weakened to a Cat. 3 storm on Wednesday, has made landfall on Florida's Big Bend region with winds of at least 130 mph.

Mutinous Gabon soldiers said they are overturning the results of a presidential election Shares of Maurel and Prom , a western oil company with operations in the country, tumbled in Paris, as did a listed subsidiary of TotalEnergies .

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The chart

Time to watch cocoa ?

Here's a chart from Chris Weston, head of research at Pepperstone:

"Having rallied for five consecutive days, we see price closing at the highest levels since 2011 [on Tuesday]. Some will see the chart and be compelled to initiate shorts given the outrageous bull trend since October, but this is a juggernaut right now and the buyers have firm control," Weston told clients.

The tickers

These were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern:

Ticker  Security name 
TSLA    Tesla 
AMC     AMC Entertainment 
NVDA    Nvidia 
VFS     VinFast Auto 
NIO     NIO 
GME     GameStop 
MULN    Mullen Automotive 
AAPL    Apple 
TTOO    T2 Biosystems 
PLTR    Palantir Technologies 

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-Barbara Kollmeyer

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08-30-23 1004ET

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