Could Quant Fund Underperformance Signal That A Correction Is Near?

Quant funds who bet on high-quality stocks, while at the same time shorting those stocks that are over-priced, have been under-performing the stock market (WSJ). This under-performance has come in part as a result of poor balance sheet stocks being pulled along by the momentum train of the last few months.

The performance gap has even widening recently as short squeezes have pushed weak stocks higher, just as those with brighter prospects have done worse. Some feel that the under-performance of higher quality stocks may be an indication that the recent move is running out of steam, and that the market may be due for a correction.

Breadth and other overbought/oversold indicators continue to flirt at times with high levels and cause concern among the bulls - but then again, they did so one month ago as well. Nonetheless, a correction, even if mild and short-term, could be in the cards as it seems an increasing number of participants have started watching and waiting for their overbought biases to be confirmed, including some of those who continue to be long in the market.