Throughout the summer, investors have been bracing against risk factors, and this sense of caution has fostered a fresh market dynamic: regardless of volatility levels, the real squeeze direction now points upward. While overall positioning remains tilted toward overweight, short-term directional exposure sits at its lowest level since the post-"Liberation Day" period in April 2025.

Data from Goldman Sachs Group Inc (NYSE: GS) prime brokerage indicates that net long-short leverage in U.S. equities dropped to 47.6% last week, with the long-short ratio edging just below 1.6. Both metrics currently rank in the 1st percentile of data from the past year. Although total risk appetite has ticked higher, it remains only in the 19th percentile. Overall, this suggests that short and hedged positions are being built up at a faster pace than long positions.

Bobby Molavi, head of execution services for Europe, the Middle East, and Africa at Goldman Sachs, notes that current positioning is "noticeably cleaner than before." Some market froth has been cleared out, and the retail chasing frenzy has also subsided. "I wouldn't say investors are underweight, but compared to June, leverage in the market is clearly no longer stretched. Additionally, in August, there has been a degree of market broadening through regional and sector rotation, as well as stock price performance."

This signal is worth paying attention to. Ahead of major August catalysts such as the Jackson Hole symposium and earnings from Nvidia Corp (NASDAQ: NVDA), hedge funds refrained from adding directional risk. Now that these key milestones have passed, the market has received mixed signals: Nvidia's earnings significantly beat expectations, reinforcing the artificial intelligence trade narrative, while market pricing has concurrently shifted toward a more hawkish monetary policy outlook. This week, the 10-year U.S. Treasury yield briefly climbed above 4.8%, exerting moderate pressure on equities.

The coming two weeks are crucial, with the probability of a rate hike at the Federal Reserve's September 15-16 meeting approaching nearly 70%. Non-farm payrolls and inflation data could either reinforce the current market logic or completely reverse expectations. However, with positioning currently light, fund managers could be compelled to chase gains if the rally reignites.

Even a significant spike in volatility may not necessarily be detrimental—it could actually serve as a positive catalyst. Throughout the year, commentary has frequently noted the phenomenon of "index rising alongside higher volatility": typically, rallies soothe the market, but in this cycle, stock prices have advanced even as market turbulence intensified. Data supports this observation: volatility no longer functions as a risk warning but has instead become a buying signal.

Three steps to test this logic: select approximately 150 stock targets spanning benchmark indices, U.S. and European sectors, and thematic portfolios like AI and defense, then observe their performance when one-month realized volatility jumps to more than 1.5 times its one-year average. In the 2026 test run, targets delivered excess returns. In the three months following such events, targets outperformed comparable portfolios by over 5 percentage points on average, with approximately two-thirds of cases yielding positive returns—the best outcome in a decade-long sample.

The market sectors flashing this signal also mirror the year's dominant themes: after volatility bursts in memory chips, optical networking, agentic AI, and data centers, relative returns surged by 30 to 80 percentage points, with semiconductors and bitcoin-linked stocks following closely behind. Conversely, in utilities, energy, real estate, and value stocks, volatility increases failed to attract capital inflows, and momentum faded after the initial pulse. This indicates that volatility only represents a bullish signal when it occurs in sectors where capital is already willing to deploy.

One caveat warrants attention: roughly half of this year's high-volatility events were concentrated in the late-March selloff and its aftermath. Consequently, the statistical excess returns largely reflect the strength of rebounds from declines. Volatility spikes triggered by falling prices have historically produced slightly better subsequent returns than those arising from rising prices. This phenomenon resembles bargain-hunting in high-beta sectors rather than a fixed mechanism of "volatility attracting capital."

The same test reveals that this pattern is conditional rather than permanent: in 2021, the identical signal acted as a sell indicator, with high-volatility targets underperforming by 5 percentage points and a win rate below 30%, a year before the bear market began. The favorable environment created by volatility can abruptly dissipate at some point. For now, though, with short-term exposure insufficient, buying dips remains the more probable scenario.

In the near term, the technical backdrop offers support. Paul Ciana, technical analyst at Bank of America Corp (NYSE: BAC), states that the validity of the S&P 500's August upside breakout continues to be confirmed. However, momentum signals have weakened, with the relative strength index (RSI) and MACD failing to confirm recent price highs. Seasonal headwinds, election uncertainty, and rising short-end yields suggest the market is entering a more pressured phase, with elevated volatility risk through September-October before strength potentially returns in November-December. "With the index holding above the 7,500 level, the uptrend remains intact; but with yields climbing, the market is more likely to consolidate and trade sideways rather than accelerate higher." He sets target levels of 8,000 and 8,234, with a potential peak of 8,541. "As long as support at 7,500-7,504 holds, the bias remains to the upside."