Goldman Sachs trader: In the current market, this is the chart I pay the most attention to!

In recent weeks, the global market has become increasingly complex, with significant challenges arising. The weakness in technology stocks, the sharp fluctuations in consumer sentiment, and the shadow of policy uncertainty are profoundly affecting investors' decisions.

Against this backdrop, Goldman Sachs trader and partner Michael Wilson wrote an article accompanied by eight charts, attempting to help investors navigate the current market.

It is worth mentioning that Wilson not only referred to the key support level of technology sector ETFs as his "number one chart of concern," but also noted the recovery momentum in the European market and the potential of innovative Chinese companies.

Below is the original text by Michael Wilson, enjoy~

At certain times, price movements reveal more than the information provided by fundamentals. On Wednesday, NVIDIA released a significant earnings report. Despite the report being nearly perfect, with strong growth momentum and an increasingly large base, the stock still fell 8% on the same day. The hottest areas of the market continue to be under pressure: over the past two weeks, our "retail darling" stock basket has dropped 10%, "meme stocks" have fallen 13%, and "Bitcoin-related stocks" have also decreased by 13%.

Needless to say, the difficulty level of the market has significantly increased in recent weeks. Nothing illustrates this better than the fact that the "Magnificent 7" (the seven tech giants) has dropped 8% year-to-date, while the S&P 493 (the remaining 493 companies in the S&P 500) has risen 4%. If that were all, the issues could be simply categorized, but the current situation is far more complex: growth expectations are rapidly resetting, concerns about consumer confidence are rising, inflation expectations have suddenly increased, doubts about the short-term sustainability of AI spending (exacerbated by rumors of Microsoft cutting data center spending), along with a resurgence of interest and activity in previously unfavored areas like China and Europe, making the situation even more complicated.

To specifically illustrate this "increased difficulty," here are several key points:

1. According to Goldman Sachs Prime Brokerage data, fundamental hedge funds (L/S HF) have just experienced their second-worst five-day performance in nearly two years.
2. We have noticed that the "momentum" factor has recently made a strong contribution to hedge fund returns. Through our "high beta momentum" factor, it is evident that the sustainability of the momentum factor in 2024 (similar to mid-2021 to mid-2022) is very significant. However, since the U.S. elections, the "momentum" factor has shown significant volatility and lost its trend, with new regions and new industries beginning to lead the market.
3. In light of the first two points, a reduction in total exposure of hedge funds would be reassuring, but the opposite is true: The surge in macro product hedging has driven the total market exposure of funds to rise. Over the past two weeks, the total leverage of hedge funds (Chart 1) and the total leverage of fundamental long-short funds (Chart 2) have risen to five-year highs of 286.5% and 2017%, respectively, while net long positions remain around the 60th percentile of the five-year review period. **

Here are 8 concise charts that collectively (not intentionally) confirm that the ongoing shift in market momentum may still have further room to grow:

1. According to our estimates, the year-on-year growth rate of U.S. GDP has dropped from slightly above 3% to below 2% over the past month. The upcoming week is crucial for tariffs, with tariff plans targeting countries like Canada and Mexico set to take effect next week. Judging from the remarks at the Trump cabinet meeting, news regarding tariffs on Europe and the automotive industry seems far off. This high level of uncertainty may lead to weakness in "soft data"; the sharp decline in today's Atlanta Fed GDPNow model serves as a reminder that the impact of policy uncertainty on economic activity may manifest quickly.

2. The sentiment data from the American Association of Individual Investors (AAII) is nearing historical highs, and the rapid shift in investor sentiment is surprising.

3. The situation of capital inflows into Europe has significantly improved (the left chart shows inflow data over the past two weeks), but the starting point is an unprecedented extreme low (detailed in the right chart).

4. The market offers investors various low-cost opportunities to gain exposure to non-U.S. market upside. For example, our research team points out that the prices of Stoxx600 (SXXP) risk reversal options are close to historical lows, with 3-month 85%/105% risk reversal options almost without premium. **

5. This week, I reviewed the market performance from 1999 to 2001, analyzing the significant decline in indices but the overweight in technology stocks, and the extreme rotation among industries, to assess the profit potential for bulls. At that time, commodity-related stocks performed remarkably, but today's narrative is entirely different. One similarity today may be the long-term demand story for AI and electrification investments, which will require a large amount of copper resources. However, copper-related stocks (with Freeport as an example in the following chart) have still not shown signs of stopping their significant underperformance relative to copper prices.

6. As a barometer of the overall market and index health and potential direction, my most 关注的 "number one chart" is the Technology Sector ETF (XLK): it has currently fallen below the 200-day moving average but remains above the upward trend line since the fourth quarter of 2022.

7. Returning to my earlier point that price trends can sometimes be more enlightening than fundamentals, the "head check" charts of the three major index constituents (NVIDIA, Apple, and Amazon) provide a reasonable reference framework for their price possibilities. The enterprise value of these stocks relative to the past 12 months of sales revenue shows that the situation is not entirely consistent (for example, Amazon has not been significantly revalued), but some large-cap stocks may enter a consolidation phase after experiencing significant increases in price and valuation multiples, which is not unreasonable.

8. Chinese smartphone manufacturer Xiaomi has just launched its latest electric vehicle, with the first batch of 10,000 units selling out in 10 minutes (YouTube reviews are worth watching). It is a mistake to think that the Chinese stock market is ignoring this—Xiaomi's stock price has increased sixfold over the past two years, and the trading price has reached twice the peak of the 2021 boom. This once again proves the return of innovation capabilities in Chinese private enterprises.