A wave of deleveraging is sweeping through the US stock market, with analysts suggesting that selling pressure may be nearing its limit. The S&P 500 index has declined by 5.8% over the past month, marking its worst monthly performance since December 2022. The trading team at Goldman Sachs believes that as institutional investors complete substantial position reductions, the market is now primed for a potential rebound, although geopolitical risks necessitate that investors maintain hedges. Analysts Gail Hafif, Brian Garrett, and Lee Coopersmith from Goldman Sachs noted in a recent report that momentum-tracking Commodity Trading Advisors (CTAs) have sold nearly $55 billion in US equities since early March. Additionally, asset management firms have reduced their S&P 500 exposure by approximately $51 billion over the past three weeks, while risk parity funds have cut about one-sixth of their long positions. The three analysts cautioned investors against shorting the market at this juncture, citing significant risks of a short squeeze for current bearish positions. This extensive deleveraging implies that any positive catalyst could trigger a sharp market rebound. The Goldman Sachs team estimates that if the market strengthens consistently, CTAs could potentially purchase up to $86 billion in US stocks over the next month. Concurrently, a shift is occurring in the trading strategies of funds that adjust positions based on volatility. Previously, during market declines, dealers were forced to sell options to hedge risks, a move that further exacerbated the downturn. Now, the situation has reversed, with dealers' position adjustments beginning to act as a buffer for market movements in both directions, contributing to greater stability.

Institutional deleveraging is nearing its end, but geopolitics remains a key market driver. Data from Goldman Sachs indicates that CTAs currently hold a net short position of approximately $18.4 billion in US equities. Barring any major shocks, the room for further selling is now quite limited. The three analysts stated that "current positioning is highly susceptible to a short squeeze if positive news emerges" and explicitly advised investors not to shift to a short stance. Regarding risk parity funds, Goldman Sachs expects their deleveraging process to continue but with "limited impact." Overall, active selling pressure from the institutional side is approaching its conclusion, and marginal selling pressure is diminishing. In stark contrast to the large-scale retreat by institutions, US retail investors have only reduced their equity allocations by about 1% from recent peaks. The Goldman Sachs team pointed out that retail investors are rapidly channeling funds into passive investment vehicles, leading to a swift narrowing of the gap between active and passive fund flows. "If there was any question about who is buying during the dip, the answer is now clear," the three analysts wrote. "Institutional clients are continuing to deleverage, while retail investors are quickly allocating capital to passive funds." The Goldman Sachs team also emphasized that geopolitical developments remain a critical factor influencing market direction. The significant pullback in the S&P 500 this month is directly attributable to the escalating conflict in the Middle East. The analysts stated that investors must maintain hedges against geopolitical developments, and the market needs to "stay hedged and remain agile in responding to new information." This means that, although both technical and fund flow indicators point to a potential rebound, any major geopolitical shock could still disrupt this process.