Hedge Funds Bet Against Stocks, but It Pays to Bet Against Hedge Funds

Hedge fund managers are more bearish than they have been at any time in more than two years, according to data from International Strategy & Investment Group cited by Bloomberg News. With the reputation that hedge fund managers have as financial geniuses, you might be inclined to dump stocks, but that could be a poor decision if history is an accurate guide.

While hedge fund managers may be better dressed than the rest of us and drive better cars, they don't seem to be any more astute than the rest of us at market timing. A post about a year ago highlighted a Citigroup (C) analysis showing a "shift from extreme optimism to extreme pessimism" by hedge fund managers during a stock market decline that looked a lot like the one that investors are suffering through today.

That extreme pessimism occurred just as the Standard & Poor's 500-stock index was embarking on a run from 1,050 to 1,350 in less than six months. Lest you think that that might have been a fluke, the previous peak in hedge fund bearishness noted by International Strategy & Investment, in July 2009, coincided with a brief dip during the rally in stocks that began four months earlier when a long bear market ended.

The positioning of hedge funds in the stock market is just one tried-and-tested contrarian indicator among many that have flashed buy signals in the last week or two by pointing to levels of fear and excessive selling that occur extremely rarely. Here's one post taking note of some of these measures, and here's one mentioning some others.

The waterfall decline in stocks may make you nervous, but if you've got the guts to buy, you may accrue some glory, and sooner rather than later. If you would rather not buy but have managed to hold on to stocks through it all, you are probably better off maintaining your resolve and staying invested.