Stocks may be headed for another selloff according to RBC’s ‘hedge fund hot dogs’ basket

A group of the most popular stocks owned by the world’s largest hedge funds are starting to underperform the broader market once again. According to a team of analysts at RBC Capital Markets, this is a sign that U.S. stocks could be headed for another blowup.

For several years now, a team of equity analysts led by Lori Calvasina, RBC’s head of U.S. equity strategy, has been tracking a basket of what it calls the “hedge fund hot dogs” — the most popular S&P 500 SPX, +1.41% stocks owned by 300 of the world’s largest hedge funds. The analysts update the basket four times a year after hedge funds release the breakdown of their end-of-quarter equity holdings.

Since it created the basket, the team has noticed a pattern: when the “hedge fund hot dogs” start to underperform an equal-weighted version of the S&P 500, it’s often a sign that a broad-based selloff in stocks was in store.

It happened in 2018, when the basket started to underperform about a month before the selloff in the fourth quarter of that year. And after a brief period of stabilization over this summer, the “hot dogs” are underperforming once again.

The indicator has worked in the other direction as well: Calvasina and her team explained that “hot dog” outperformance in April and May made them optimistic that a near-term bottom might be approaching.

The chart below depicts the performance of the ‘hedge fund hot dogs’ basket relative to the equal-weighted S&P 500 index.

The chart below depicts the performance of the ‘hedge fund hot dogs’ basket relative to the equal-weighted S&P 500 index.

Source By: marketwatch