U.S. stocks face sell-off, but Goldman Sachs says there is no sign of extreme position crowding.
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Since the end of March, the US stock market has been continuously rising without pause, and investors have many reasons to be concerned. However, for traders at Goldman Sachs, extreme overcrowding is not at the top of their worry list.
The bank's comprehensive sentiment indicator, which tracks the exposure of institutions, retail investors, and foreign investors to US stocks, currently hovers around 0.2, indicating neutral positioning. Tom Shea and other Goldman traders wrote in a client report that this "suggests market participants have not fully embraced the current rally."
Although bullish sentiment in US stocks has continued to build up previously, the data above suggest that there is currently none of the excesses that usually leave little room for error. Roundhill Financial Inc.'s CEO Dave Mazza stated:
"If we don’t see frenzied buying during the rally, then when market sentiment turns sour, it’s unlikely we’ll see everyone rushing for the exits. This rally may not be as feverish as it appears on the surface."
There are several reasons why US stocks have not been overcrowded yet. According to Mazza, since the end of March, the stock market has risen by 16% (as of Thursday), and large funds may be unwilling to chase the highs.
Max Gokhman from Franklin Templeton Investment Solutions pointed out that hedge fund positioning in US stocks is uneven: they have heavy exposure to AI-related stocks and are lighter elsewhere. Goldman’s compiled data show that hedge funds' net leverage (longs minus shorts) is at its highest level in a year.
Gokhman commented: "Hedge funds are leaping over the wall of worry with leverage, while institutional investors are waiting to see how more feverish investors will land on the other side."
Earlier Option Market Showed Signs of Frenzy, Market Sentiment Reverses on Friday
However, while the current US stock rally scores low on overcrowding or investor 'position crowding' indicators, signs of frenzy are hard to ignore. In the options market, demand for protective strategies has almost vanished, and investors seem more worried about missing the rally than hedging downside risk.
Goldman Sachs' panic index (which combines the CBOE Volatility Index, the VVIX Index measuring VIX volatility, and at-the-money volatility) closed last week near a two-year low.
The skew of S&P 500 options (a closely watched indicator of downside protection demand) has fallen to an 18-month low, as put options have become cheap while call options are getting more expensive.
On Friday, market sentiment shifted as stronger-than-expected US employment data pushed up Fed rate hike expectations, and signs showed little progress in temporary peace talks between the US and Iran.
Meanwhile, S&P Dow Jones Indices announced it would maintain the inclusion standards for benchmarks like the S&P 500, rejecting a proposal to allow large-cap stocks to enter the index faster after listing, which also worsened market sentiment.
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