Goldman Sachs' trading team released a report warning that the market is experiencing a decoupling of momentum and positioning; although deleveraging may be in its later stages, global aggregate leverage remains at the 93rd percentile over the past five years, and meaningful risk reduction has not yet been completed.Article author and source: Wind Windward
Goldman Sachs' top trading team warns that the market is experiencing significant momentum and position unwinding; although deleveraging is nearing its end, risks have not been fully eliminated, and multiple key events will continue to suppress volatility. In the current market environment, the cost-effectiveness of actively buying protective positions is rising.
On July 29, Gail Hafif, Brian Garrett, and Lee Coppersmith from Goldman Sachs’ Institutional Equity Sales and Flow team described the market conditions since July in their latest Flow Report as "a beach vacation interrupted by monsoon and tsunami warnings."
The report indicates that over the past several weeks, the market has experienced significant momentum retracement and position unwinding. Although institutional positions have been partially reduced, global total leverage remains at the 93rd percentile over a five-year historical lookback, suggesting that meaningful risk reduction has not yet been completed. Meanwhile, retail activity is beginning to cool, while corporate buybacks are re-entering the market—this force will serve as the most stable and reliable buying support in the short term.
Looking ahead to August, upside potential is likely constrained by seasonal fund outflows, weak institutional buying interest, and downward pressure from dealers' positive Gamma positions, resulting in a range-bound trend for equities overall. Additionally, on a systematic strategy level, the S&P 500 has already broken below its short-term trigger level; if prices continue to decline, selling pressure from the CTA community will be unlocked, with sell volumes in a downside scenario far exceeding buy volumes in an upside scenario—fund flows exhibit clear asymmetry. If the market declines over the coming week, systematic sell orders could reach $24.9 billion, far surpassing the approximately $2.3 billion in buy orders under an upside scenario.
In this context, the Goldman Sachs trading team has identified three core recommended trades: going long on correlation (a dispersion strategy), buying three-month IWM put options, and implementing short-term option protection on GSXURFAV retail favorites, explicitly stating that as the probability of a macro-level Corr1 event continues to rise and individual stock volatility remains elevated, the window for purchasing protective trades is opening.
Leverage reduction has entered its "later stage," but the market continues to navigate through the wreckage. The Goldman Sachs trading team noted that over the past several weeks, the market has experienced significant momentum and positioning unwinds. Although this round of de-grossing may be entering its later stage, several key events remain unresolved—including geopolitical developments, the Federal Reserve’s policy direction, and corporate earnings season—which will continue to sustain high market volatility.
Based on institutional positioning data, the global gross leverage remains at the 93rd percentile over a 5-year lookback and the 65th percentile over a 1-year lookback. This reveals a key contradiction: despite recent clear deleveraging actions, institutional positions remain extremely crowded over a longer time horizon, and meaningful risk reduction has yet to occur.
The report specifically highlighted that the global information technology sector faced the heaviest pressure. On Goldman Sachs' proprietary prime brokerage book, the net selling of global information technology long positions last Friday was the largest since September 2024, with a Z-score of -3.6, representing one of the largest deleveraging moves in the past five years.
The report suggests that positioning-level burdens no longer constitute a market resistance, and fundamentally driven healthy trading is expected to gradually return, "but before discussing any meaningful repositioning, we still need to navigate through the wreckage left over the past several weeks."
Fund flows: Retail cooling, passive inflows hit record levels; August may see a "buyer's strike." Goldman Sachs trading team clearly judges: equities will remain range-bound in the short term. Looking at the fund flow structure, the Goldman Sachs trading team believes August faces multiple headwinds, with insufficient "fuel" for upside momentum.
On one hand, mutual funds have historically held cash before midterm elections and deployed it aggressively afterward, meaning this buyer group contributes limited demand to U.S. equities until the votes are settled. Overseas investors also tend to modestly reduce their U.S. equity holdings from now until one month before the election.On the other hand, August tied with May as one of the months with the largest net outflows from stocks in mutual fund and ETF history.Rising geopolitical concerns, energy price pressures, and monetary policy uncertainty are paving the way for a temporary pause in buying activity during August.Notably, year-to-date, stock ETFs and mutual funds have collectively recorded the largest inflows on record at $659 billion.
Among these, passive stock funds have seen net inflows of $742 billion year-to-date, while actively managed funds have experienced net outflows of $83 billion, reflecting retail investors' extreme enthusiasm for momentum and leverage this year.Just in July alone, $34 billion flowed into U.S. stock funds, marking the third-largest July inflow in over 20 years.The Goldman Sachs trading team expects this momentum to clearly cool off in August, with early signs already appearing.
The Gamma structure is suppressing upside movement; a decline would amplify the Gamma structure in the options market, further reinforcing the view that the stock market is range-bound. According to Goldman Sachs data, dealers are currently holding positive Gamma on the S&P 500, with Gamma increasing further to the upside and decreasing to the downside.
This structure implies that upward movements will be constrained, making it difficult for the market to sustain a smooth rally; meanwhile, during declines, Gamma positions will amplify downward pressure. However, the Goldman Sachs trading team believes that a major downward move is likely in its later stages.
Pressure at the systematic strategy level is also significant. The S&P 500 has fallen below Goldman Sachs’ estimated short-term trigger level of 7,453 points; should prices continue to decline, systematic strategies such as CTA will trigger sell orders. Currently, systematic strategies collectively hold approximately $196.3 billion in long positions in U.S. equities, placing them at the 48th percentile over a three-year lookback period, with CTA positions also at the 44th percentile. Amid weakening market liquidity, the additional volume of potential sell orders will have an amplified effect.
Goldman Sachs' quantitative estimates show: Over the coming week, if the market remains flat, net selling will amount to approximately $1.3 billion; if it rises, net buying will be around $2.3 billion; if it falls, net selling could reach as high as $24.9 billion—the vast disparity among these three scenarios clearly reveals the current downward skew in capital flows.
Goldman Sachs specifically noted that as market liquidity diminishes, the impact of sell orders will be amplified, and flow predictions exhibit significant asymmetry under downside scenarios.
Corporate buybacks provide the most reliable support; amid the above multiple headwinds, corporate buybacks are the structural support factor most valued by the Goldman Sachs team.
Report data shows that approximately 31% of S&P 500 constituents (by number) are currently in their buyback open window; this percentage is expected to rise to about 53% by next weekend; by mid-August, over 90% of constituents will be in their open window.
Goldman Sachs expects a significant surge in open-market buyback demand throughout August as more companies emerge from earnings blackout periods and actively execute repurchases during the post-earnings window.
The report characterizes this as "the most supportive and reliable capital flow for August U.S. equities," helping to sustain persistent buying pressure as investors digest the aftermath of deleveraging.
Corr1 risk is rising: The narrowing spread between single-stock and index volatility is a warning sign. This is the most警示性 part of the market structure in this report.
Goldman Sachs noted that the S&P 500 one-month implied correlation has slightly risen during the recent decline. Previously, individual stock volatility was at historically high levels, while index volatility remained relatively low, creating an unprecedented spread. As individual stock volatility has declined from its highs, this spread is now narrowing.
Amid ongoing macroeconomic uncertainty and market-wide unwinding of momentum enthusiasm, the probability of a Corr1 event—where market correlation surges to near 1 and individual stocks plummet in tandem with indices—is rising and has entered the risk radar of market participants.
In the small-cap space, Goldman Sachs notes that the Russell 2000 (IWM) has historically underperformed during the first two weeks of August, and this pattern is likely to continue this year, as monetary policy and geopolitical uncertainties will compound downward pressure; furthermore, the index’s relative strength year-to-date suggests it has room for a correction.
Based on the above analysis, the Goldman Sachs trading team (Gail Hafif, Brian Garrett, Lee Coppersmith) offers three specific protective trading recommendations:
- Reverse Dispersion: Go long on correlation by selling single-stock volatility swaps on the top 50 components of the S&P 500 while going long on the S&P 500 index volatility swap, profiting from an increase in correlation.
- IWM three-month put options: The current IWM one-month 25 Delta put option is at the 48th and 46th percentiles over one-year and five-year historical lookbacks, respectively, offering reasonable protection costs and serving as a hedge against rising interest rate risk.
- Short-term options protection for GSXURFAV: Establish short-term options positions on the basket of retail hot stocks tracked by Goldman Sachs (GSXURFAV) to hedge against potential volatility following a cooldown in retail activity.
Finally, Goldman Sachs' Portfolio Strategy Team reviewed the historical performance patterns of the U.S. stock market during midterm election years:
- Before the election: The stock market was range-bound with no clear direction;
- Post-election to year-end: Stock market experiences a trending upward movement;
- Volatility: Began a moderate rise in late summer, then accelerated significantly in the month leading up to the election.
In addition, mutual funds tend to hold higher cash levels before midterm elections and only deploy capital in bulk after the results are announced. Foreign investors also follow a similar pattern, typically reducing their U.S. stock holdings modestly about a month before the election.
The team believes this implies limited incremental buying from mutual funds and foreign investors in the short term, but this does not constitute a major bearish signal for the stock market; the broader conclusion is that the recent market lacks a "catalyst" for upward movement, while year-end potential upside opportunities remain.