Hedge funds make a sudden turn: Energy stocks are abandoned after just one week, while technology becomes the new favorite.

With energy stocks rising under short squeeze support, Goldman Sachs' prime brokerage (PB) business found that energy stocks were once favored by hedge funds this month, but were quickly abandoned and recently returned to the embrace of technology stocks, with investment trends taking a sharp turn.

Two weeks ago, the net buying scale of energy stocks reached a new high in a year, with a one-year standard deviation of 1.4, mainly driven by short covering.

However, the above trend did not last long, as hedge funds returned to favoring long/short trading pairs after a brutal short squeeze. Goldman Sachs reported over the weekend that energy was one of the sectors with the most nominal net selling scale in US stocks, with last week's fund flow reversing the net buying volume of the week ending September 18, with long selling volume exceeding short returns at a ratio of 7:1.

Goldman Sachs PB data shows that after the largest net buying week in more than a year for energy stocks, the nominal long selling scale of US energy stocks last week was the largest in six months, exceeding 99% of the levels in the past five years.

This example illustrates that "smart money" lacks confidence in any trade and that everyone is a momentum-chasing day trader.

After fleeing energy stocks last week, the long/short ratio of US energy stocks fell again to 1.52, lower than the 1.87 at the beginning of this year, and lower than 93% of the levels in the past year and 87% of the levels in the past five years.

While clearing out energy stocks, hedge funds have been buying into technology stocks. Goldman Sachs PB data shows that after six consecutive weeks of net buying, the information technology (IT) sector became the sector with the most nominal buying scale among US stock sectors last week.

The nominal net buying scale of the IT sector reached a two-month high last week, mainly driven by short covering in the semiconductor and semiconductor equipment, as well as technology hardware stocks.

Moreover, hedge funds have different approaches to technology stocks compared to energy stocks, as they were only forced to buy energy stocks during short squeezes. Currently, the long/short ratio of hedge fund investments in the IT sector is 1.94, higher than 71% of the levels in the past five years, and the long/short ratio for the communication services sector is 3.66%, higher than 92% of the levels in the past year and 64% of the levels in the past five years.

In terms of the main body of technology stocks, Goldman Sachs' report states that their baseline judgment is that mega-cap stocks have good buying opportunities, believing that the gap between valuation decline and fundamental improvement represents an opportunity for investors. After adjusting for growth, the current trading discount of mega-cap stocks is the largest in the past six years compared to the median trading price of the S&P 500 constituents. The chart below shows the changes in the price-to-earnings ratios of six major blue-chip technology stocks, including Apple, Microsoft, Amazon, Google, NVIDIA, Tesla, and Meta, compared to the price-to-earnings ratios of other S&P 500 constituent stocks since 2014.