Frustrated by market volatility over the European debt crisis and uncertain U.S. economic outlook, the so-called smart money-hedge funds-has thrown in the towel for 2011 and pulled out of stocks, according to fund managers, SEC filings and exchange data.

Hedge funds have slashed their exposure to stocks-both on a long and short basis-to the lowest level since 2008, according to Bank of America Merrill Lynch analysis of SEC disclosures and NYSE and Nasdaq data.

Their net long exposure to stocks plummeted by more than a third, the biggest drop since 2009, stated the report by analyst Mary Ann Bartels entitled "Hold 'em and Fold 'em."

Ironically, the move by the Wall Street pros may not have come at the best time. A coordinated move by central banks on Wednesday to ease Europe's debt crisis sent global markets soaring and sparked hopes for a year-end rally.
But hedge funds are clearly as worn out by gyrating markets as everyone else.

"The uncertainty coming from the Eurozone has created an environment where almost all asset classes have traded in tandem and fundamental analysis has been almost irrelevant," said Michael Murphy, CEO of hedge fund Rosecliff Capital.
"The very analysis that hedge funds rely on has become secondary to the headlines coming out of Europe on a daily basis."

David Fuller's view The subscriber who forwarded this article included the comment: "A contrary indicator?"

I believe so, and when we hear that many investors have raised cash, an important bottom is usually close at hand. In fact, I think we have seen it.

The short, sharp bear market that Fullermoney mentioned on numerous occasions earlier this year saw important lows in September and October. They have held for many stock market indices and not least on Wall Street. This week's upside dynamics have reaffirmed those lows.

Where the September and October lows were broken by some of the weakest stock market indices, we now see provisional evidence of downside failures. Fullermoney concludes that the cyclical bear is slowly giving way to the next cyclical bull trend, fuelled by cash on the sidelines, a move away from "safe-have bonds", more stimulative monetary policies from growth economies, the Fed's ongoing stimulus, and what should soon be a more accommodative ECB.

(See also chart reviews below.)