The S&P 500 index just refreshed its historic closing record, yet there is a strange atmosphere on Wall Street—it's not a celebration, but a state of alertness. At the close last Friday, the S&P 500 hit a new high, but 324 constituent stocks fell that day, resulting in a net breadth reading of -148, which is the second worst breadth performance when hitting a new high in history. In other words, the index is at a new high, but most stocks are declining.

This feeling of "the index rises, individual stocks fall" reminds me of the rebound after the crash in March 2020—at that time, it was also only a few technology stocks that propelled the index upward, resulting in a severe shakeout shortly afterward. And now, Goldman Sachs' trading desk has already raised the alarm.

The largest leveraged reduction by hedge funds in seven months

Goldman Sachs' brokerage data shows that last week saw the largest nominal leveraged reduction in U.S. stocks in seven months, primarily driven by risk liquidations. The reductions in consumer discretionary and technology sectors were the most aggressive, marking the third largest single-week leveraged reduction in nearly five years.

What does this mean? Simply put, hedge funds are collectively "reducing positions to avoid risk." I encountered a similar scene in April 2020, when, following the pandemic's impact, hedge funds suddenly reduced leverage on a large scale, leading to about a 10% correction in the market thereafter.

Goldman trader Brian Garrett wrote in a weekend memo that hedge funds' net exposure "remains relatively restrained within a range of plus or minus 53% for the year," considering this a prudent risk management approach in a market environment characterized by frequent "unknown unknowns." In plain language: even these most astute funds are buying insurance; should retail investors also consider if they are being too optimistic?

$25 billion in passive selling is imminent

The second warning signal comes from pension fund rebalancing. Goldman estimates that the end-of-April pension fund rebalancing will create approximately $25 billion in selling demand for U.S. stocks. How significant is this number? It ranks among the top 15 of all selling estimates since 2000. If we exclude quarterly expiration factors, this is even the largest single-month selling estimate on record.

Pension fund rebalancing constitutes "passive selling," unaffected by market sentiment, selling exactly what needs to be sold. This means that regardless of how the market behaves next week, these $25 billion in sell orders will come crashing down. I recall a similarly scaled rebalancing in October 2022, when the S&P 500 fell about 3% over the subsequent two weeks.

The largest buyers are already "fully allocated"

The third signal comes from the trend-following strategies (CTA). Since April, the CTA group has been the most important source of capital for the global stock market's rise, accumulating approximately $53 billion in global stock purchases during the month, with net purchases of about $32 billion in the S&P 500 alone. However, Goldman’s futures trading desk data shows that this buying momentum has come to an end.

In layman's terms, the CTA group of "buy high, sell low" machines has bought enough, and they are no longer net buyers, but slightly inclined to sell during stable market conditions. This means the market has lost an important "automatic stabilizer." Once the market begins to decline, the CTA selling will further amplify the downturn.

The semiconductor sector's performance reminds one of 2000

The fourth signal comes from the extreme performance of the semiconductor sector. The Philadelphia Semiconductor Index (SOX) has risen for 18 consecutive trading days, setting the record for the longest consecutive rise in history, closing about 50% above its 200-day moving average last Friday. This is the most extreme deviation from the 200-day moving average since the peak of the bubble in 2000.

I remember in March 2000, the Nasdaq index had a similar situation—the index hit a new high, but the breadth was extremely poor, with the semiconductor sector skyrocketing. What happened next? Over the following two years, the Nasdaq fell by 78%. Of course, the foundational context now is entirely different; the AI-driven demand for semiconductors is real, but the principle of "after a big rise, there will be a fall" has never changed.

Emotional indicators have entered a "stretched zone"

The fifth signal comes from Goldman Sachs' U.S. stock sentiment indicator: investors' positions now show a "stretched" characteristic. From the derivatives market perspective, the S&P 500's gamma position is in a rare zone, with market makers holding an extremely net short gamma state regarding the direction of spot price breakthroughs. This means that once a price directional breakthrough occurs, volatility will be significantly amplified.

Currently, almost no professional investors hold direct bullish positions; the implied volatility of call options in July is trading only around 12. Going long for upward potential remains a "lonely trade"—this is an interesting phrase indicating that the smartest money in the market is not optimistic about the short-term trend.

Is a correction a buying opportunity?

Despite the five warning signals pointing to a short-term correction, Goldman still believes that the S&P 500 will close significantly above current levels by 2026, and corrections should be seen as structural buying opportunities. Historical data shows that whenever the S&P 500 experiences a pullback of over 10% before reapproaching its previous high, the subsequent average returns over one week, one month, and three months are 1.5%, 5.2%, and 8.6% respectively.

My view is: cautious in the short term, optimistic in the long term. This week will be the busiest of the year, with both the Federal Reserve and the Bank of Japan announcing interest rate decisions, and about 44% of the market capitalization of S&P 500 constituents will report earnings this week, including tech giants like Google, Microsoft, Amazon, Meta, and Apple. These events combined with the five signals above make short-term volatility inevitable.

But if you ask me, I would say: corrections are opportunities. However, don’t rush in on the first down day; let the market digest these risks first. Investment decisions need to consider personal circumstances, as uncertainty always exists in the market.

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