As the higher-for-longer inflation narrative continues to play out, institutional investors may be cycling into more defensive plays. European hedge funds are doing just that, and traders may want to consider mirroring that move. Per a Reuters report published in Yahoo Finance, a Goldman Sachs report on trading flows noted that European hedge funds are buying into defensive stocks this month and divesting their holdings from cyclical plays. In addition to higher inflation. Geopolitical risk stemming from the Middle East is another reason these funds are playing more defense.
“From the start of October, we have observed a sharp rotation from cyclicals into defensives, arguably as a reaction to the macroeconomic/geopolitical environment,” the Goldman Sachs report said.
Per the report, allocation to cyclicals has fallen under 2% from 7%. As far as defensive allocation goes, European funds are adding more consumer staples, healthcare, and utility names.
“Consumer staples (are) among the most net bought sectors in October so far, while discretionary names are being net sold,” Goldman Sachs added.
If the rest of the capital markets follow this move accordingly, traders may want to keep an eye on the Direxion Daily Consumer Discretionary Bull 3X ETF (WANT). The fund is up over 30% for the year despite high inflation, but a collective move to more defensive holdings could apply selling pressure.
Consider Defense Sectors Like Utilities
In the meantime, traders may want to get bullish on the aforementioned defensive sectors like utilities. This can help smooth out volatility, especially in the current market times, where Federal Reserve interest rate decisions could make for heavy market fluctuations.
“These companies are typically regulated and operate in a stable and predictable business environment,” The Street explained. “As such, utility ETFs can offer investors a reliable source of income and a hedge against market volatility.”
Short-term traders looking to up the ante on their utilities trade can consider the Direxion Daily Utilities Bull 3X Shares (UTSL). That extra juice from the triple exposure could amplify profits should the utilities sector witness even more upside in 2023, especially if a safe haven scramble takes place if the U.S. economy enters a recession.
UTSL seeks daily investment results equal to 300% of the daily performance of the Utilities Select Sector Index. The index includes companies from the utilities sector that includes the following industries: electric utilities; multi-utilities; water utilities; independent power producers and energy trades; and gas utilities.
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