After eight weeks of selling, U.S. hedge funds are buying stocks at the fastest pace since 2021.

On Monday, October 14th, financial blogger Tyler Durden published an article stating that both U.S. hedge funds and the overall stock market have seen a significant increase in trading volume recently. The U.S. stock market is experiencing active buying and market rallies, but high market valuations are a cause for concern and may trigger future adjustments.

According to data from Goldman Sachs Prime Brokerage, the net purchase of individual stocks by hedge funds is the largest since December 2021, with seven out of eleven sectors being net purchased this week. In terms of nominal amounts, the healthcare, finance, industrial, and information technology sectors are leading. Fund managers have net purchased U.S. healthcare stocks for the third consecutive week, at a pace not seen in over a year.

For most of the second half of this year, especially since the collapse of arbitrage trading in August, U.S. stocks seem to have overcome numerous concerns and continued to rise - last Friday, the S&P 500 index reached its 45th historical high this year, the best performance of the 21st century.

U.S. stock market trading volume surges, high valuations raise concerns

According to data from Goldman Sachs Prime Brokerage, after eight consecutive weeks of selling, the pace of hedge funds' net purchases of U.S. stocks has reached the fastest in four months, mainly driven by individual stocks. The net purchase volume of individual stocks has reached the highest level since December 2021, with a ratio of long purchases to short covering of 1.2 to 1.

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However, under this frenzied buying wave, the overall investment level of hedge funds remains relatively low. The total leverage ratio of U.S. fundamental long-short funds only increased by 0.2 percentage points to 192.4%; the net leverage ratio increased by 1.3 percentage points, only 53.5%; and the long-short ratio increased by 1.5 percentage points, reaching 1.777.

Looking at the data from Goldman Sachs' equity sales and trading department, the buying volume is even more apparent. Goldman Sachs trader Matt Kaplan pointed out that, thanks to the moderate PPI data offsetting the impact of the rise in CPI, the market rose broadly last week when the S&P 500 index reached a new high again. The equal-weighted S&P 500 index outperformed the weighted index by about 40 basis points, while the Russell index rose by 2%.

Under the massive trading and high valuations in the U.S. stock market, Kaplan said:"The only ongoing debate in a bear market is about overvaluation."

Durden believes this is understandable, as even Goldman Sachs analyst David Kostin admits that the current forward price-to-earnings ratio of the U.S. stock market has reached a "ridiculous" level of 22 times!

Hedge funds' net purchases of U.S. stocks have hit the fastest pace in four months.

Here are detailed statistics from Goldman Sachs Prime Brokerage on the U.S. stock market last week:

Macro products such as indices and ETFs saw a slight net sell-off, mainly driven by short sales. Short positions in U.S.-listed ETFs increased by 1.3%, focusing mainly on large-cap stocks and corporate bond ETFs.

The net purchase volume of individual stocks was the largest since December 2021, mainly driven by long buying and short covering. Out of 11 sectors, 7 were net bought this week, with healthcare, finance, industrials, and information technology sectors leading in nominal terms, while real estate, utilities, and consumer staples sectors with high dividend yields were all net sold.

The information technology sector performed the best this week, with net purchases also ranking at the top, mainly driven by long buying, with slightly less short covering. The software industry and the technology hardware industry had the most net purchases, while the semiconductor and its equipment industry had the most net sales. Despite the recent increase in purchases, the net position of U.S. software stocks remains low.

Fund managers have net bought U.S. healthcare stocks for the third week in a row, at the fastest pace in over a year, mainly driven by long buying and short covering.

All sub-sectors were net bought this week, with biotechnology, pharmaceuticals, and healthcare providers and services sectors leading. The total long-short ratio of pharmaceutical, biotechnology, and life science stocks is now 2.70, the highest level since May, although it is still at the 12th percentile in a five-year review.