Overseas market turning point? This is the interpretation from the head of Goldman Sachs hedge fund

Before the sharp drop on Thursday, the US stock market had hit new highs multiple times, rising to a level that made people "fear heights".

However, after the release of lower-than-expected US CPI data on Thursday, the upward momentum of the US stock market was instantly halted. What should be the next move?

Tony Pasuariello, head of hedge funds at Goldman Sachs, pointed out in a recent report that during the sharp drop in the US stock market on Thursday, there was a clear shift in market style. The Russell 2000 Index outperformed the Nasdaq Index by nearly 6% on Thursday, indicating that many leveraged investors are reducing their positions.

However, Pasuariello emphasized that the S&P 500 Index still showed a significant increase this week, considering the advantage of large-cap tech stocks and the reaction of investors to US inflation, which still supports the future rise of the US stock market. Moreover, he is not willing to bet against the current strong uptrend.

However, within this framework, considering some tactical factors (worsening seasonal factors, US stock valuations, etc.), there are reasons to take some measures to reduce risks. Therefore, we still insist on keeping the best assets in our pockets and using cheap options to protect them.

He also added that the latest inflation data, along with the rise in unemployment rate and Fed Chairman Powell's recent dovish turn, paved the way for a rate cut in September.

How is the flow of funds in the US stock market?

Pasuariello pointed out that the price movements of the US stock market have already revealed everything. Hedge funds have switched to net buying since last week, continuing until the sharp drop on Thursday. Both retail investors and long-term funds have been steadily buying US stocks.

Traders have been trading short-term options, allowing market participants to better manage risks and to some extent reduce the actual volatility of the market. Overall, although I am a bit worried about the stock market, the current fund flow is still positive.

Will Japan continue to plummet?

Starting this Monday, the Japanese stock market performed well, but then plummeted rapidly - similar to the US stock market, but factors related to foreign exchange fluctuations caused the Japanese stock market to slightly rise this week. Next, it is important to pay more attention to the fundamental changes affecting Japanese stocks.

Pasuariello is relatively optimistic about the future performance of Japanese stocks:

(1) During the consolidation period in the second quarter of the Japanese stock market, traders suffered heavy losses. Therefore, compared to before, the current trading trend is more obvious, and many investors are starting to favor Japanese stocks again;

(2) Moreover, this week the Japanese stock market easily absorbed a large amount of selling pressure from dividend stocks, which is a healthy signal;

(3) I wouldn't say that Japanese stocks are very cheap right now, but I think it's worth noting that Japanese stocks have not yet exceeded the peak P/E ratio during the Abe economics era in 2015, and the current fundamentals are much more stable

Does the French election results affect the global market?

Pasuariello gave a surprising answer: the results of the French election are not important and will not have a significant impact on the global market, as it reduces some tail risks against the European Union (at least for now).

If the election results lead to some form of political deadlock, I guess Europe will do what it does best - use various expedients to deal with it.

On the other hand, Goldman Sachs analyst Rich Privorotsky pointed out more objectively:

The market seems to take a more punitive response to uncertainty, which can affect economic growth. It is still unclear whether the French parliament can form a government, and international investors investing in Europe are running out of patience.

Outlook for the US stock market

Regarding the recent trend in the stock market of "bad news is good news," Pasuariello stated that although he usually does not like this black-and-white binary explanation, it cannot be denied that recently the US stock market has shown a pattern of "weak data = rate cut = increased risk appetite." Moreover, the net long exposure and total risk exposure of hedge funds have been increasing recently, which is a matter to consider.

The Nasdaq index closed above 20,000 points for the first time last week. At this point, I want to revisit a previous comment: during the tech bubble in the late 1990s, the Nasdaq reached over 5,000 points. Then from March 2000 to October 2002, the Nasdaq plummeted by 80%. The mention of Nasdaq 5000 points is a mockery of the euphoria of the bubble era, and it took a full 15 years to recover to this level. Considering this, the current trend of the Nasdaq seems somewhat unusual. This is why we use derivatives to reduce our risk