The "danger signal" of the US stock market: Why did hedge funds suddenly sell off?

Hedge funds collectively short, Wall Street sounds the alarm.

Recently, the U.S. stock market has been hitting new highs, but a disturbing phenomenon is drawing the attention of Wall Street analysts—according to the latest report from Goldman Sachs, institutional investors, especially hedge funds, are massively shorting the U.S. stock market, which could be an "important warning signal for stock investors."

On January 5th, Goldman Sachs derivatives strategist John Marshall pointed out that equity funding spreads are an important indicator of professional investors' positions. This indicator saw a significant decline after the Federal Reserve announced a hawkish policy stance on December 18th last year, indicating that institutional investors are significantly reducing leveraged long positions. Marshall emphasized in the report:

"The sell-off through futures channels continued this week, reflected in the decline of leveraged long financing costs. The weakness in financing spreads on Thursday is an important phenomenon, indicating that the changes in December are not solely related to year-end factors."

Goldman Sachs trader Vincent Lin also confirmed this trend, noting in a report on January 3rd:

"Hedge funds have net sold U.S. stocks for five consecutive trading days, with the selling speed being the fastest in over seven months."

Specifically:

1. Global stocks experienced the largest net sell-off in over seven months, primarily driven by short-selling activities;

2. Net selling occurred across all regions, with North America and emerging Asian markets being particularly notable;

3. Both macro products and individual stocks faced net selling, accounting for 77% and 23% of the total net sell-off, respectively;

4. Among the 11 global sectors, 8 experienced net selling, led by healthcare, finance, and industrials; only the information technology, materials, and energy sectors saw net buying.

Marshall believes that although U.S. stock valuations have remained at historical highs for several months, "this is the first time in years that we have seen these two position indicators (financing spreads and hedge fund net positions) showing significant sell-offs simultaneously." Referring to December 2021, when concerns over monetary policy triggered sell-offs by professional investors, the S&P 500 index subsequently experienced a 10-month decline.

However, some believe that unless significant macro factors trigger a large-scale sell-off, this round of selling may ultimately evolve into another large-scale hedge fund short squeeze, which would push the S&P 500 index to new highs.