January saw hedge funds dump more money into the stock market than in any other January in the past decade. According to data from State Street, hedge fund inflows hit $100 billion — more than double the typical $40 billion average for the month.
That’s a bullish signal, no doubt.
Big-money investors don’t throw cash around for fun. When hedge funds make moves like this, it usually means they see something the rest of the market hasn’t fully caught onto yet. And with the S&P 500 making fresh highs, it’s clear there’s still an appetite for stocks, even with lingering inflation concerns.
But there’s a catch…
The Market Is Rallying on a Weaker Foundation
While the overall market has been moving higher, fewer stocks are actually participating in the rally. Market breadth is weakening — and that’s not a good sign for what happens next.
At the start of December, about 70% of stocks were trading above their 50-day moving averages, meaning they were in short-term uptrends. That number has since fallen to below 50%, meaning more than half of stocks are now in short-term pullbacks.
The same goes for the 200-day moving average, which is a longer-term bull market signal. In December, 65% of stocks were trading above that level. Now it’s closer to 50%.
If fewer stocks are holding up the market, that means gains are increasingly reliant on just a handful of names. We’ve seen this before. The biggest stocks in the S&P 500 — names like Apple (AAPL), Microsoft (MSFT) and Nvidia (NVDA) — carry more weight because of how the index is structured.
But the equal-weighted version ETF of the S&P 500 (RSP), which gives all stocks the same influence, has been moving lower. That means without the megacaps pulling their weight, the market wouldn’t be at all-time highs.
This kind of divergence doesn’t guarantee a pullback, but it does raise the risk of one. When a market keeps climbing on a weaker foundation, it’s a little like playing Jenga. The tower can keep stacking higher — but if too many blocks fall out at the bottom, it doesn’t take much to knock it over.
What Comes Next?
None of this means the market is about to crash. But it does suggest that a mild pullback is likely, which could set up better buying opportunities in the months ahead.
Historically, February is a middling month for stocks, but March, April and May tend to be strong. If we see a dip here, it could be the last good chance to get positioned before the next seasonal run higher.
For now, this is more about position sizing than making drastic moves. I’m still bullish on the market overall, but I’m keeping my trades smaller until a clearer opportunity presents itself. If we do get a pullback and sentiment shifts, that’s when it’ll be time to step in with heavier trades.
For now, the hedge fund flows are encouraging. But if this market is going to keep running higher, it needs more than just a handful of stocks doing all the work.
Graham Lindman
Graham Lindman Trading
Follow along and join the conversation for real-time analysis, trade ideas, market insights and more!
Important Note: No one from the ProsperityPub team or Graham Lindman Trading will ever contact you directly on Telegram.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
P.S. Trade War Chaos? This Stock Is Built to Win
Donald Trump just took the global trade war to the NEXT level…
While most stocks will struggle, I’ve spotted ONE stock to target for 100% ROI as it cruises through unscathed.
