Hedge funds call time on tech rally, banks say

Global hedge funds sold tech stocks at their highest pace in almost eight months in the week to Feb. 23, Goldman Sachs said, piling into bets against the sector just as Nvidia’s (NVDA.O) latest earnings fuelled a surge in tech shares.

The tech share selling by hedge funds ranked among the highest seen in the last five years, according to the Goldman Sachs note released on Friday and seen by Reuters on Monday.

In a separate note, Morgan Stanley said tech was the most net sold sector last week.

Stock indexes, including the tech-heavy Nasdaq (.NDX), have rallied to record highs on optimism about artificial intelligence. Chipmaker Nvidia (NVDA.O) added $277 billion in stock market value on Thursday, Wall Street’s largest one-day gain in history, after the company’s quarterly report beat expectations.

But in a sign that sentiment may be turning, the number of hedge funds that now have short bets that tech stock prices will fall is twice versus those with long positions, Goldman Sachs said.

Hedge funds took short bets against stocks from tech companies across the sector. They exited long positions and added short punts on manufacturing and service equipment for the semiconductor industry, tech hardware, storage and IT services, the bank said.

The speculators added short bets to software companies, Goldman Sachs said, while Morgan Stanley said hedge funds bet against semiconductor and tech hardware companies.

However, traders remained reluctant to completely sever their positive positions in tech, a separate note from Goldman Sachs said. That pointed to a two-year high in call options on Nvidia.

These are derivatives bets which only make the trader long if the stock passes a certain price threshold – a way to express a positive position in the stock but only if it rises to a certain extent.

Speculators were generally short US stocks, piling into the largest net selling of the region’s equity markets in five weeks, the first Goldman Sachs note said.

Persistent price rises by US service sector businesses have underscored the stickiness of inflation and pushed back expectations for interest rate cuts in 2024, denting hopes for a soft landing.

Traders ditched tech, health care and industrial stocks and instead bought the largest amount consumer staples stocks in 10 weeks, adding companies which make products that people routinely buy, Goldman Sachs said.

Morgan Stanley said hedge funds sold equities Monday through Wednesday, but changed their minds after the Thursday tech rally sparked by Nvidia and bought back all of what they previously sold, mainly in industrials, materials and financials.