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Chart Of The Day: Why Are Hedge Funds Betting On Berkshire Hathaway?

Published 09/06/2022, 07:46 AM
Updated 07/09/2023, 06:31 AM
BRKb
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Warren Buffett is one of the most followed stock market investors alive. You will always find articles online with the legendary investor's anecdotal financial tips and which stocks his company Berkshire Hathaway (NYSE:BRKb) is buying or selling.

However, smart money has also been betting on the Omaha-based conglomerate. In the second quarter alone, hedge funds invested nearly $1 billion in Buffett's company.

Why are professional investors betting heavily on the 92-year-old stock market guru? Is it because he's old-fashioned?

Buffett famously said:

"If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."

So, do smart stock pickers think it's time to hunker down for the long haul amid an ongoing bear market?

I previously outlined how, except for energy, investors are rotating into defensive and yield-paying stocks, sectors that outperform during a downturn.

Professional money managers are willing to tie their future performance to Buffett's, even if his company declines simultaneously. They might be betting it will be the best place to be in order to preserve value until the eventual bottom.

On June 21, I wrote that BRKb completed an H&S top in January but I warned that "there's a good chance the stock will rebound from this point on the support of the 100 WMA, which barely dipped below that measure, and the July 2021 low." I explained the market mechanics that would cause a rebound before a continued downturn, including developing a larger H&S top.

Berkshire Hathaway Weekly

Indeed, the sock rebounded since the last post but then found resistance, forming a potent shooting star (exceptionally long upper shadow, small real body), precisely by the first, smaller H&S neckline, reinforced by the 50-week MA. That return move—a function of covered shorts and triggered longs—was overcome by continuous supply, pushing the price below its short-term rising channel and the 100 WMA. If the stock falls below the trend line tracing the lows since June 2021, trading will have completed a massive H&S top.

Berkshire Hathaway Daily

The stock completed an even smaller H&S top, from July 29 through August 13, framed between the 50 DMA and the 100 DMA as it crosses below the 200 DMA. In June, the 50 DMA already fell below the 200 DMA, triggering a Death Cross. After completing the pattern, the price started a return move that verified the neckline's resistance.

Target

The smallest H&S top's implied target based on its height is $267.

The medium H&S top's implied target, measured by its height is $237.

If that scenario follows, the price will also complete the larger H&S. That implied target based on its height is estimated at $160, the 2020 bottom.

Time

Based on the time of their developments, I expect the price to reach its first target as early as this month and the medium top's target by as early as Dec.

The larger H&S has been developing since May 2021. If the larger H&S completes, the period since then is expected to repeat itself to the downside.

Trading Strategies

Conservative traders should short if the price retests the channel bottom.

Moderate traders would short if the asset rallies.

Aggressive traders can enter a long contrarian position before joining the rest of the market with a short.

Trade Sample 1 - Aggressive Long:

  • Entry: $277
  • Stop-Loss: $275
  • Risk: $2
  • Target: $283
  • Reward: $6
  • Risk-Reward Ratio: 1:3

Trade Sample 2 - Follow-Up Short:

  • Entry: $284
  • Stop-Loss: $286
  • Risk: $2
  • Target: $278
  • Reward: $6
  • Risk-Reward Ratio: 1:3

Disclaimer: The author currently does not own any of the securities mentioned in this article.

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