Short squeeze risk is real! Goldman Sachs: Macro short positions at a 10-year high

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As the S&P 500 index rises for the eighth consecutive week, Goldman Sachs has found increasingly obvious signs of a short squeeze emerging in the market. The report points out that the continuous accumulation of short positions and the rise in demand for call options are providing technical support for further gains in US stocks, but it also means the market's dependence on this kind of flow-driven momentum is deepening.

According to Goldman Sachs’ prime brokerage data, US macro products (indexes and ETFs) now have the highest short positions in the past decade. Facing uncertainties such as geopolitics, interest rates, and oil prices, many investors are choosing to hedge via indexes and ETFs, while avoiding shorting individual stocks directly. However, if the market continues to rise, these shorts might be forced to cover, generating extra buying and further pushing up stock prices.

The options market is sending similar signals. Brian Garrett, a Goldman Sachs derivatives trader, pointed out that about 25% of S&P 100 constituents have an inverted call option skew, a ratio close to levels seen during the 2021 "retail stock squeeze" period. In his view, the market is exhibiting clear "upside option-ization" characteristics, as investors continue to bet on an upswing and market makers, in hedging against related risks, must continue to buy stocks, further amplifying upward momentum.

Goldman Sachs believes this is both a supportive factor and a potential risk for the market—the current rally is, to a certain extent, being driven by short covering and options flows, rather than a full improvement in fundamentals. Once this technical buying weakens, market volatility may increase.

US Stock Liquidity Improves: Tech Stocks See Renewed Buying, AI Semiconductors Remain Focus

Goldman Sachs prime brokerage data shows that last week the overall US stock market saw a small net inflow, with long buying roughly 1.2 times the scale of short covering. Meanwhile, the total leverage ratio of US long-short funds saw the largest single-week increase in over three years, and trading activity recovered broadly across industries.

By sector, individual stock segments have seen net inflows for the third consecutive week. Information technology, consumer discretionary, and real estate were most favored, while consumer staples, materials, and energy faced net outflows. Notably, both total and net exposures in the information technology sector have climbed to their highest levels in nearly five years, at the 100th percentile in history.

After a month of reducing positions in US tech stocks, hedge funds clearly shifted last week, adding to information technology at the fastest pace since mid-March. Goldman Sachs Delta One desk noted, funds are still mainly flowing into semiconductors and AI-related areas, though the current market sentiment is noticeably more rational compared to the frenzied chasing earlier in April.

Divergence Within Consumer Sector: Discretionary Recovers, Staples See Outflows

However, within the consumer sector, fund flows show clear divergence.

After reducing positions in the consumer discretionary sector for nine out of the past ten weeks, hedge funds sharply bought back last week, with the fastest net buying in over two months. Almost all sub-industries except autos saw inflows, with broadline retail, textiles/apparel and luxury goods, hotels/restaurants & leisure, and durable consumer goods most favored.

In stark contrast, the consumer staples sector saw concentrated outflows, not only posting the largest weekly net selling among all industries but also setting the highest net selling record in over five years. Fund managers generally adopted aggressive short strategies, led by consumer staples distribution and retail.

This divergence reflects the market’s complex views on the outlook for US consumption. On one hand, capital is starting to bet on an improvement in discretionary spending; on the other hand, the fundamentals of consumption remain under pressure. Walmart shares fell 7% in one day after reporting results, the biggest single-day drop in three years; meanwhile, the University of Michigan’s final consumer sentiment index for May fell to a historic low, and high oil prices and interest rates continue to dampen spending appetite. Goldman Sachs Delta One desk pointed out that although signs of recovery are appearing, the consumer sector as a whole remains one of the least favored by the market.

Risk Warning and DisclaimerThe market has risks, and investment needs caution. This article does not constitute personal investment advice and does not take into account individual users’ special investment goals, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article fit their own circumstances. Investing based on this is at your own risk. ```