Lifted in toto from Barron's Stocks to Watch, Aug. 27:
Stocks are surging, but many institutional investors hate the rally.
One top trader at an international firm told me he was liquidating his 401k into cash at the close. That’s how much he mistrusts the ferocity of this week’s move.
A few days ago, one of my best sources, an institutional trader who mentored me when I was a wee lad, emailed to say this and it is worth repeating.
He says that he believes “Risk Control Funds” are driving equity flows. He says these funds go by different names – risk parity, risk budgeting or risk control. Each operates a little bit differently, but each essentially does the same thing. When volatility spikes, they sell stocks and buy bonds or move to cash.My source, who has run some of the biggest trading desks on the Street, equates this action with portfolio insurance that was popular before the 1987 crash. Portfolio insurance entailed shorting index futures against stocks to manage risk. As the market corrected, index futures were repeatedly sold at lower prices. The trading technique was blamed for the 1987 crash.
I don’t want to raise the flag of the bearish past but this talk is starting to spread.Stocks to Watch Homepage