Goldman Sachs: Bearish Macro Product Scale Reaches High Since End of 2022, Positive News May Trigger Rapid Rebound in US Stocks.

The trading department of Goldman Sachs Group stated that the current position structure of hedge funds in the US stock market may create conditions for a strong rebound in US stocks after recent volatility. Data shows that speculative funds maintain long positions in individual stocks while establishing a large number of short hedges through macro products such as exchange-traded funds (ETFs) and stock index futures. The current short position size has reached the highest level since September 2022. According to data from Goldman Sachs' chief brokerage business team, hedge funds overall still maintain a bullish stance on individual stocks but continue to increase hedging at a macro level. John Flood, head of Goldman Sachs Americas Stock Execution Services and partner, said that this "long stocks, short index" structure reflects the market's response to multiple uncertainties, including conflicts in the Middle East, credit market concerns, and doubts surrounding the artificial intelligence investment cycle. However, this structure also implies that if positive news occurs in the market, investors may be forced to quickly cover the short hedges they have established, leading to a rapid increase in the index. Flood stated in an interview that if a major announcement of conflict resolution occurs, the index could experience a significant rebound. "The market could rise by 2% to 3% in a short period, with a significant portion of the increase coming from the covering of short hedges on macro products." Data shows that the total exposure of hedge funds has reached about 307%, close to historical highs. This indicator measures the total value of long and short positions. Flood pointed out that in the current environment, the "right tail risk" of the market breaking out to the upside is actually higher than the downside risk. "Due to the large scale of overall positions and the significant increase in short positions in macro products, the occurrence of positive news could trigger an aggressive covering rally." A similar trend briefly occurred in the market on Monday. When US President Trump commented that a war with Iran could be "resolved very quickly," the S&P 500 index, which had briefly dropped 1.5%, eventually closed up 0.8%. Traders generally believe that this reversal partly came from investors covering their previous short hedges. However, the S&P 500 index is still about 3% below its historical high, while the declines in many individual stocks are more pronounced. The volatile market environment has already impacted some investors. Goldman Sachs data shows that due to rapid sector rotation, fundamental long-short hedge funds saw a drawdown of about 4% in year-to-date returns last week. Meanwhile, other types of institutional investors are still in a wait-and-see mode. Flood stated that long-term funds, including traditional asset management companies and sovereign wealth funds, are currently waiting for clearer signals. "Long-term investors have been performing well since the beginning of the year until the Middle East conflict erupted," Flood said. "In an environment of increasing macro uncertainty and heightened market volatility, many institutions are now choosing to temporarily wait." Share buybacks provide some support to the market. Goldman Sachs' corporate buyback trading department stated that last week, the activity of companies executing stock buybacks reached one of the highest levels in three years, with many companies increasing buybacks due to recent stock price declines. Retail investors still play an important role in the stock market, but if the job market significantly weakens, this source of funds may decrease. Flood pointed out that if there are multiple negative employment reports in the future, the market may worry about retail fund outflows leading to a stock market decline. However, he believed that a single weak employment report is not enough to change the current market situation. Looking ahead in the next few weeks, Goldman Sachs believes that market volatility may further intensify. Although the daily trading volume this year has exceeded 20 billion shares, market depth has significantly decreased. Goldman Sachs estimates that the S&P 500 futures can be traded in size of about $4 million at the best bid-offer price, significantly lower than the historical average of about $14 million. Usually, when this indicator is below $7 million, it indicates increasing market liquidity pressure. Flood stated that this means that the impact of large institutions on prices will be significantly amplified when conducting large transactions. As for the ultimate market trend, it largely depends on the development of geopolitical situations. Flood pointed out that investors generally expect signals of easing in the Middle East conflict in the next two weeks. If the conflict lasts longer and there is no positive progress, the stock market indices may face new pressures.