Institutions have sold off over $100 billion in U.S. stocks; Goldman Sachs: The April rebound window may be quietly opening.

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The wave of deleveraging is sweeping the US stock market, and analysts say short-selling power is nearing its limit.

The S&P 500 index has fallen 5.8% over the past month, marking its worst monthly performance since December 2022. The Goldman Sachs trading team believes that as institutional investors have completed large-scale reductions in holdings, the market is now poised for a rebound, but geopolitical risks still require investors to maintain hedges.

Goldman Sachs analysts Gail Hafif, Brian Garrett, and Lee Coopersmith noted in their latest report that momentum-tracking Commodity Trading Advisors (CTAs) have sold nearly $55 billion in US stocks since early March, while asset management institutions have reduced S&P 500 positions by about $51 billion over the past three weeks, and risk parity funds have cut about one-sixth of their long exposure. The three analysts warn investors not to short the market at this time, citing the significant short squeeze risk associated with current short positions.

This large-scale deleveraging means that once a positive signal emerges, the market could see a sharp rebound. The Goldman Sachs team estimates that if the market continues to strengthen, CTAs may buy up to $86 billion in US stocks over the next month.

Meanwhile, the trading strategies of funds that adjust positions based on volatility are undergoing changes. Previously, when the market declined, traders were forced to sell options to hedge risks, which further exacerbated market downturns. Now, the situation has reversed, and traders' position adjustments are beginning to buffer market moves on both the upside and downside, helping to stabilize the market.

Institutional deleveraging near conclusion, geopolitics still key to market direction

Goldman Sachs data shows that CTAs currently hold about $18.4 billion in net short US stock positions, and barring major shocks, further selling space is very limited. The three analysts stated, “Current positions are highly susceptible to short squeezes if positive news arises” and explicitly advise investors not to turn to short selling.

For risk parity funds, Goldman Sachs expects their deleveraging process to continue, but “with limited impact.” Overall, institutional active reductions are nearing their end, and marginal selling pressure in the market is weakening.

In stark contrast to institutions' large-scale retreat, American retail investors have only reduced equity allocations by about 1% from their peak. The Goldman Sachs team pointed out that retail investors are quickly pouring funds into passive funds, and the gap between active and passive capital flows is narrowing rapidly.

“If the question is who’s buying the dip, the answer is now clear,” the three analysts write. “Institutional clients continue deleveraging, while retail investors are rapidly investing in passive funds.”

The Goldman Sachs team also emphasizes that geopolitical events remain the key factor influencing market direction. The sharp pullback of the S&P 500 this month has been driven by the ongoing escalation of conflicts in the Middle East.

Analysts say investors must keep hedging against geopolitical developments, and the market needs “to keep hedges and flexibly respond to new information.” This means that although technical and capital flows point towards a potential rebound, any major geopolitical shock could still disrupt the process.

Risk Warning and DisclaimerThe market carries risks; investment should be cautious. This article does not constitute personal investment advice and does not take into account individual users’ specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions herein suit their particular circumstances. Investing based on this information is at your own risk. ```