Goldman Sachs and Bank of America both issue sell warnings, but hedge funds are returning to tech stocks, signaling a divergence in U.S. stock market positions.

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The current US stock market is displaying a rare pattern of position division: institutional sentiment indicators have issued sell signals for three consecutive weeks, while hedge funds and options traders are simultaneously increasing their holdings, with technology stocks being particularly prominent. The coexistence of long and short signals makes it increasingly difficult to predict the direction of the market.

Goldman's sentiment indicator has been in the "overstretched" sell zone for the third consecutive week, while Bank of America Merrill Lynch's Bull & Bear Indicator has also reached an extreme reading of 9.5, with analyst Michael Hartnett explicitly issuing a sell signal. The warnings from both major institutions resonate, casting a shadow over the market's optimism.

Meanwhile, hedge funds have net bought US stocks for the first time in four weeks, with the information technology sector attracting the most capital inflows, especially semiconductor stocks. Option market bullish sentiment has climbed to its highest level since December 2020, with the put/call ratio plunging to 0.61. The vastly different operations of these two types of investors make the overall position landscape full of contradictions.

Goldman Sachs and Bank of America Issue Sell Signals Simultaneously

Position indicators from both major Wall Street institutions point in the same direction—market sentiment is overheated.

Goldman's composite sentiment indicator integrates nine position indicators from institutions, retail investors, and overseas investors, and historically holds statistically significant predictive power for short-term returns of the S&P 500 Index. This indicator has now been in the “overstretched” sell zone for three consecutive weeks.

Bank of America Merrill Lynch strategist Hartnett states, their Bull & Bear Indicator currently reads 9.5, triggering a clear sell signal which continues to persist. This indicator is usually regarded as a contrarian indicator for market sentiment—the higher the reading, the more overheated the market is.

Hedge Funds Increase Positions Against the Trend, Tech Stocks as Main Buying Direction

Despite high institutional warning signals, hedge funds are taking the opposite approach in practice.

According to Goldman’s prime brokerage data, hedge funds had net buys of US stocks this week for the first time in four weeks, mainly driven by covering individual stock short positions. The information technology sector saw the largest net buy volume, with fund managers concentrated on replenishing semiconductor positions, even though the sector as a whole remained in net selling over the past month.

Leverage data also rose. The total leverage ratio for long-short equity strategy funds climbed by 1.1 percentage points to 204%, at the 4th percentile for the past year; net leverage rose by 0.7 percentage points to 51.7%, at the 21st percentile. Both figures are historically low, indicating that hedge funds’ overall positions remain relatively conservative, with this increase in positions more of a marginal exposure adjustment.

Options & Large-Cap Tech: Bullish Sentiment Heats Up

Signals from the options market align with hedge funds’ direction, and are even more pronounced.

According to Barchart data, options traders’ bullishness on the stock market has reached its highest since December 2020, with the overall put/call ratio sharply dropping to 0.61, reflecting a significant increase in bets on market upside.

Option activity in large-cap tech stocks is also active. Goldman’s volatility trading desk shows a clear rebound in call option volumes for mega tech stocks. Deutsche Bank data indicate modest increases in positions among mega growth and tech stocks, with large-cap tech position readings at 0.65 standard deviations, at the 88th percentile over the past year—elevated but not extreme.

Additionally, according to Sentiment Trader, insider buying in the tech sector has noticeably increased, a signal often regarded as informed participants using real money to express optimism about company prospects.

Retail Investors Retreat, Overall Position Structure Becomes Divided

In contrast to the moves of institutions and hedge funds, retail investors are clearly withdrawing.

According to Vanda Research, the speed at which retail investors are buying stocks is now at its slowest pace in more than six years, demonstrating a sharp cooling in individual investors’ enthusiasm for market participation.

Looking at overall positions, Deutsche Bank’s composite reading shows equity positions have risen slightly this week to a "moderate overweight" level, at 0.21 standard deviations and the 53rd percentile. Large-cap equity positions are a bit higher at the 68th percentile; large-cap tech stocks rank even higher at the 88th percentile, though not yet in the extreme range.

On momentum strategies, JPMorgan data show that related positions and performance have retreated from highs, but have not fallen to extreme lows.

Abnormal Volatility Structure: Extreme Divergence Between Individual Stocks and Index

The market currently also displays a noteworthy structural signal: extreme divergence between implied volatility for individual stocks and for the index.

According to Deutsche Bank, implied volatility at the individual stock level is high, whereas implied volatility at the index level is relatively mild, and the gap between them has widened to extreme levels. This corresponds to a market with very low correlation between stocks and highly dispersed individual stock returns.

This means that present market risk does not stem from systemic overall downside, but is more manifest in intense differentiation between individual stocks. For investors, stock-picking skill is greatly magnified in importance under current conditions, while simply holding the index captures relatively little risk premium.

Risk Disclosure and DisclaimerThe market carries risk, and investment should be approached with caution. This article does not constitute personal investment advice, nor does it take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their own situation. Investing based on this information is at your own risk. ```