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I’m trying to decide if we’re watching a legitimate rally or a classic bear trap. If this rally is real, and likely to run for a while, investors should be putting cash to work even at market highs. If it’s a bear trap–you know one of those upward moves designed to pull in cash from the sidelines just before green turns to red in the market–then you ought to be using this moment as a selling opportunity, taking profits, and building cash for better bargains down the road.

I think it’s really, really hard to tell right now. This rally is built on a belief that the Federal Reserve is done raising interest rates (which I think is likely) and that the Fed will begin to cut interest rates as early as March (which I think is a very aggressive schedule, and probably too aggressive a schedule.) What we don’t know is how disappointed the market will be if the Fed doesn’t cut rates until July (or later.) We will get some indication of a likely reaction after the Fed releases its new Dot Plot projections for interest and inflation with the December 13 meeting of its Open Market Committee.The Fed’s October minutes, due for release today, and the reaction to them, might give us a clue as well.

But really right now we’re beating the bushes for clues.

On Monday Goldman Sachs provided a useful clue that belongs (I think) on the negative side of the ledger.

Goldman analyzed data from 735 hedge funds with $1.6 trillion in long equity positions and $797 billion short.

Its conclusion: The average fund has 70% of long portfolio in its top 10 positions. Hedge funds are holding their most concentrated wagers on U.S. stocks than anytime in the past 22 years, Goldman Sachs concluded. An index created by Goldman to track crowding across hedge funds has reached a record high. The most popular bets remain in megacap tech, with Microsoft (MSFT), (AMZN) and Meta Platforms (META) in Goldman’s list of “Hedge Fund VIPs.” A group of seven tech companies account for about 13% of the average hedge fund long portfolio, twice the weighting from the start of 2023, Goldman’s analysis shows.

I’m not sure that investors can draw any solid conclusion for the general market from this survey. Certainly the market looks to have recovered its enthusiasm for the biggest of big cap tech stocks. The Nasdaq 100 Index has jumped 14% since reaching a low in late October.

If this rally were to broaden to include more stocks in its upward move, then the current big tech concentration would be a positive indicator. If the concentration in big tech stocks, however, is taking place because investors are worried about earnings and revenue growth as a result of the Fed’s efforts to slow the economy to fight inflation then this kind of concentration signal a potential bear trap.

Too soon to tell, I’m afraid.