Chart of the Day - Monday, February 1st, 2021

Today's Chart of the Day was shared on Twitter by @Moritz_of_Hesse. The top chart comes from Morgan Stanley Prime Brokerage. It essentially shows the degree to which hedge funds reduced leverage/risk by covering their short positions and selling some of their longs. As you can see, hedge funds de-grossed in a big way last week. This sort of extreme de-grossing has often coincided with bottoms in the S&P 500. In a comment to The Chart Report, Moritz said, "Last week was a 7 sigma event, in terms of de-grossing. You typically see this during a liquidation event due to systemic risk. In this case, the S&P 500 did not significantly decline, but the end result of the deleveraging (more dry powder on the sidelines) was the same."