Written by: Rita
In July, U.S. equities experienced a rare reversal in momentum and positioning structures, with deleveraging nearing its conclusion. Goldman Sachs’ flow team, in a report released on July 29, concluded that U.S. equities are unlikely to see a trend-driven move in August, with the market expected to remain range-bound overall. Geopolitical tensions, Federal Reserve decisions, and the earnings season will continue to disrupt markets, keeping volatility elevated. While indices have upside potential after deleveraging, they must first absorb prior volatility before large-scale rebalancing can begin.
Leverage remains high, and tech stocks are at the core of this correction.
According to Goldman Sachs prime brokerage data, the global account total leverage is at the 93rd percentile over a 5-year lookback and the 65th percentile over a 1-year lookback. Recent weeks of concentrated selling have only temporarily alleviated leverage pressure, as overall levels remain elevated, with the information technology sector bearing the heaviest selling pressure.
Last Friday, global tech stock long positions saw the largest selling volume since September 2024 and one of the largest single-day sell-offs in the past five years. On that day, global accounts recorded net selling, with a long-selling-to-short-covering ratio of 1.4 to 1. Global deleveraging occurred simultaneously across regions, but the structure varied: the U.S. and emerging Asia primarily reduced long positions, while developed Asia and Europe focused more on short covering. All 11 U.S. sectors simultaneously reduced risk exposure, with the technology sector leading the decline.
In July, U.S. equity funds saw net inflows of $34 billion, the third-highest July inflow in the past 20 years. Goldman Sachs expects inflows in August to gradually slow, with early signals already emerging. Current positioning pressures have largely been cleared, creating conditions for the market to shift toward fundamental pricing. However, prior disruptions still need to be absorbed before new capital flows in en masse.
Repurchases served as the core support in August, pressured by seasonal capital outflows.
Historically, August ties with May as the month with the heaviest outflows from equity funds and ETFs. Geopolitical risks, energy prices, and policy uncertainty collectively suppress buyer risk appetite. Ahead of the midterm elections, mutual funds tend to hold cash in anticipation of the election outcome. Overseas investors also exhibit similar behavior, often moderately reducing their U.S. stock holdings in the month leading up to the election. Short-term incremental capital supporting index gains remains limited.
Repurchases were the most certain buying support in August. Currently, about 31% of S&P 500 components are in their repurchase window, expected to rise to 53% by month-end; over 90% of companies will emerge from their earnings blackout period by mid-August. Once the blackout periods end, repurchase demand will be released en masse, providing sustained buying support to the market.
Traders hold a positive gamma position on the S&P 500, continuously increasing upward long exposure while reducing downward short exposure. This positioning structure suppresses upside potential for the index and reinforces a range-bound trading pattern. While the gamma mechanism amplifies volatility during declines, Goldman Sachs assesses that the downside space is already quite limited.
Quantitative capital flow exhibits asymmetric downward movement.
The S&P 500 has broken below the short-term trigger level of 7,453. Further decline in the index will trigger concentrated selling by CTA strategies. Goldman Sachs estimates that systematic strategies hold approximately $196.3 billion in long U.S. equity positions, at the 48th percentile of three-year positioning, with CTA positioning at the 44th percentile, indicating an overall neutral level.
Market liquidity gradually tightened in August, with capital flows exhibiting an asymmetric downward trend. The increased scale of quantitative selling will intensify market impact and elevate short-term volatility.
Goldman Sachs recommends inverse diversification and IWM put options
In response to the volatile environment in August, Goldman Sachs outlined three structural trading directions.
Inverse Diversification Strategy: Short 2.5x leveraged volatility swaps on the top 50 components of the S&P 500, while simultaneously going long volatility swaps on the S&P 500 index with the same structure. The core logic is to gain exposure to rising market correlation, profiting from the spread between declining individual stock volatility and rising index volatility.
IWM three-month put options: Historically, the first two weeks of August have seen weak performance for the Russell 2000 Index, and this weakness may persist given current monetary and geopolitical uncertainties. The index has outperformed the broader market this year, leaving room for a correction. The IWM one-month 25-delta put options are positioned at the 48th and 46th percentiles over one-year and five-year periods, respectively, making them suitable as a hedge against an interest rate hike scenario.
Retail momentum stocks short-term options: Since July, trading activity in the retail sector has been below the five-year average, with daily trading volume as a percentage of market cap more than 3% lower than the 2021–2025 average. Goldman Sachs will monitor how this gap evolves in August to identify structural opportunities in the options market.
This round of deleveraging adjustment is nearing its end, though its aftershocks have not yet fully subsided. In August, the market’s primary support came from corporate buybacks, while headwinds included seasonal capital outflows, quantitative selling, and institutional conservative positioning. The directional upside for indices is limited; volatility arbitrage and structural hedging are more suitable trading strategies for this environment.
Disclaimer
This article is a compilation and interpretation by Chaoxiang Research of a third-party brokerage research report (Goldman Sachs, July 29, 2026), combined with publicly available market information. The ratings, price targets, earnings forecasts, and related judgments cited herein reflect the views of the brokerage’s analysts and represent the position of their respective institution only; they do not reflect the views of Chaoxiang Research nor constitute any investment advice.
The market carries risks; make decisions independently. This article should not be used as a basis for buying or selling any securities.