The method that has been effective in the past six months is no longer working? Goldman Sachs traders warn: It's time to hedge US stock momentum

Goldman Sachs trader Guillaume Soria expressed concerns in a report released on Wednesday morning that the rotation of funds in the US stock market last week may indicate that the constantly changing backdrop could alter the current momentum, and it is now time to hedge the momentum.

Momentum means that the methods that worked yesterday can still work today. Since the beginning of this year, the hot concept of artificial intelligence (AI) has supported the momentum of US stocks to achieve the best performance in the same period in years. Previously, momentum benefited from the background of the Fed's interest rate hikes and intertwined with the long-term themes dominating the market.

Two consecutive weak CPI data and the possibility of a rate cut in July resurfacing indicate that we may still be on track for a soft landing, and low-quality, high-risk assets that are part of short-term momentum may continue to outperform the broader market.

As the market reprices rate cuts, the increasing possibility of a change in US administration, and the reevaluation of the AI concept, are the methods that have been effective in the past six months still valid?

After the US CPI was announced last Thursday, the rotation of factors betting on the US stock market began, and this trend continued into this week.

Soria believes that given the changing market dynamics, with the continued rotation of US stocks as pointed out by Goldman Sachs last week, it may be reasonable for investors to take profits from the momentum rally, as evidenced by the underperformance of large-cap stocks compared to small-cap stocks in the past five days, the worst performance since 2020.

As of this Tuesday, the five-day gap between large-cap stocks and small-cap stocks is the largest since 2020, and it has reached a level that has only occurred 99% of the time in the past ten years.

Goldman Sachs' Barra Size index remains neutral on sectors, industries, and other factors.

From a size perspective, this is the largest scale change in 15 years. If clients have profited from size trades and are concerned about the rate cut cycle, Goldman Sachs has a basket of indices to choose from, which can trade a project in Goldman Sachs' swaps or options (GSP1SIZE index).

Although AI concept stocks are overvalued, earnings forecasts for key individual stocks were not released until Thursday, with NVIDIA releasing its quarterly financial report on August 28, and currently there are no short-term catalysts, so there may be room for a short-term pullback in US stocks, while the size factor may underperform.

A basket of long and short stock indices tracked by Goldman Sachs shows that the most heavily shorted stocks in the market are still in the early stages of rising due to short covering.

Goldman Sachs' charts show that so far, momentum has been associated with long-term themes with large-cap stocks and strong balance sheet attributes. For listed small companies, interest rates have been almost as important as growth since 2022, and it can be said that, compared to larger cyclical issues, some growth issues have more pricing significance.

Soria recommends selecting some indicative options as a hedge for short to medium-term ongoing transitions in the investment portfolio, such as the GSP1MOMO index and GSXUBFML index for momentum, and the GSP1SIZE index and GSP1SIZE index for size