A Turning Moment Challenging the S&P 500 ETF

The dominance of the S&P 500 as a benchmark for passive investors may be facing a challenge, as key players like Michael Burry and Citadel take bearish positions against major ETFs. A closer look at the S&P 500's recent performance reveals an anomaly of concentration in a few top companies driving the index's gains. Technical analysis also suggests the possibility of downward momentum. This article explores the potential turning point for the S&P 500.

Published over a year ago
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Reviewed by Ellen Johnson

The S&P 500, long considered a reliable choice for passive investors, is facing potential challenges as influential investors like Michael Burry and Citadel take bearish positions against major ETFs. The concentration of gains in a few top companies within the index raises questions about its overall performance. Technical analysis indicators also suggest the possibility of a downward trend. This article examines the factors that may indicate a turning moment for the S&P 500 and the potential implications for investors.

The S&P 500's dominance was so revered that betting against it was considered financial heresy. Yet, Michael Burry, the legendary investor renowned for predicting the housing crash, has made a bold play against it. According to recent 13F filings, Burry's firm, Scion Asset Management, has taken a bearish position against two major ETFs. They hold $886m of put options against the SPDR S&P 500 ETF and put options valued at $739m against the Invesco QQQ Trust ETF. This enormous bet constitutes a staggering 94% of his invested portfolio.

However, as audacious as Burry's move might seem, he has been wrong many times before and solely relying on his opinion would be foolish. However, he's not alone. Citadel, a top-tier hedge fund with an impressive track record, has also shorted the S&P 500 and QQQ, dedicating about 20% of their portfolio to this stance. When significant market players with an acumen for identifying trends converge on a singular direction, it warrants attention.

Moreover, when looking deeper into the S&P 500's recent performance, an potentially intriguing anomaly is revealed. While the index saw an upswing in 2023, this rise was primarily driven by the top 7 companies, which surged by +53%. The remaining 493 companies stagnated, suggesting an unprecedented concentration. In simple words, the positive performance of the index, which consists of 500 companies, was driven by only 7.

Nevertheless, predicting market downturns is notoriously challenging. As the Peter Lynch noted, 'Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.' So, to go beyond narratives and historical trends, we turn to technical analysis which offers a more dispassionate insight.

In fact, even technical analysis suggests that we might be on to something here. Recent chart patterns show an RSI exceeding 70, coupled with the emergence of the bearish tweezer tops candlestick pattern formation at the exact same time. This confluence is strongly hinting at possible downward momentum, but only time will tell if this newly created resistance level will be broken.

Perhaps, if our hypothesis proves right, Seth Klarmans critique of indexing might finally come true. He noted that an alarming volume of investments are made with a blind eye to business fundamentals, often through indexing strategies. As emphasized by Barron's, a self-sustaining cycle has emerged where the success of indexing boosts the index's performance, which then fuels further indexing. But Klarman warned of potential repercussions when the tide turns.

'When the market trend reverses, matching the market will not seem so attractive, the selling will then adversely affect the performance of the indexers and further exacerbate the rush for the exits.'

The Morale of Our Hypothesis?

In conclusion, the S&P 500, while always the belle of the ball, might be heading for a plot twist. With big names like Burry and Citadel casting doubting glances and some inner inconsistencies, this is a season of the financial series you don't want to miss. Current signs, both qualitative and quantitative are not bullish, so perhaps for the first time in history, you might overthink the foolproof strategy of investing in the S&P500.

PS: Please keep in mind that this is only a trading idea and not financial advice. Even though there might be signs of a weakening economy, always do your own thorough research and consult with a financial professional before actually investing your own money.

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