Goldman Sachs warns: US stocks have "extreme rebound" momentum, with hedge short positions triggering short covering rally

Goldman Sachs’ trading division recently pointed out that the current hedge fund position structure is forming a special situation: investors are maintaining long positions in individual stocks on one hand, while establishing large short positions through ETFs and index futures for hedging on the other. This strategy is laying the groundwork for potential and strong short-covering momentum in the market. Once positive news emerges, the stock market could experience a rapid and sharp rebound.

(Middle East conflict drives oil prices higher, Bitcoin remains above 70,000)

Goldman Sachs: Institutional hedging short positions reach a three-year high

Bloomberg reports that Goldman Sachs’s prime brokerage data shows that hedge funds are still relatively optimistic about long positions in U.S. stocks, but at the same time, they are building large short positions through ETFs and index futures to hedge overall market risk. The scale of these macro hedging shorts has risen to the highest level since September 2022.

The proportion of hedge funds shorting the market via index and ETF positions is approaching the high point around September 2022.

This reflects that investors are actively responding to concerns such as the ongoing Middle East conflict, rising corporate credit risks, and surging AI expenditures, rather than solely being bearish on U.S. stocks.

Once positive news appears, the index is expected to rise rapidly

John Flood, head of U.S. equity execution services at Goldman Sachs, stated that the current market position structure indicates that “Right Tail Risk” is greater than “Left Tail Risk,” meaning the chances of a significant upward move may be higher than the risk of decline.

He said, “If major positive news emerges, such as de-escalation of geopolitical conflicts, the market could quickly see short covering, driving the index to surge in a short period.”

Flood gave an example that, in extreme cases, U.S. stock indices could experience a straight-line jump of 2% to 3%, mainly driven by the short covering of macro hedging shorts:

Investors experienced a preliminary version of this scenario early Monday, when the S&P 500 initially fell 1.5% in the morning but closed up 0.8% after President Trump stated that a war with Iran would be “resolved very soon.”

High leverage and low liquidity will amplify market volatility

Goldman Sachs also pointed out that the total gross exposure of hedge funds has reached 307%, a new high, indicating that funds are holding large long and short positions simultaneously. The market leverage is high, and market liquidity has noticeably decreased.

Goldman estimates that the trading depth at the best bid and ask prices for S&P 500 futures is only about $4 million, far below the historical average of approximately $14 million. Insufficient liquidity means that large institutional trades are more likely to drive price swings, potentially leading to more intense market fluctuations in the coming weeks.

Market watch: waiting for geopolitical and economic signals to stabilize

Although there is potential rebound momentum in the market, Goldman Sachs notes that many long-term funds, such as traditional asset managers and sovereign wealth funds, remain cautious. Additionally, retail investors continue to be a significant source of recent stock market buying, but if employment data continues to worsen, retail demand could weaken.

Currently, the market is in a highly uncertain phase. If signs of easing in geopolitical conflicts appear in the short term, short covering could quickly boost stocks; conversely, if uncertainty persists, U.S. stocks may face new volatility and pressure.

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