Goldman Sachs liquidity expert: Systemic demand for US stocks has been exhausted, expecting September to be "challenging"

Goldman Sachs warns that as September, the worst-performing month of the year for U.S. stocks, approaches, a key support for the U.S. stock market—systematic demand—has essentially dried up, indicating that the market will face challenges this month.

Goldman Sachs' liquidity analysis team recently pointed out in a report that CTA (Commodity Trading Advisors) positions have reached a 100% full position, meaning that the historically weak September will lack supportive capital inflows. More importantly, this could trigger sell-offs of up to $73.69 billion during market downturns, posing a significant asymmetric downside risk.

However, Goldman Sachs emphasizes that the market is not entirely without support. The overall positioning of institutional investors remains relatively moderate, and record-long positions held by traders, along with the extremely low correlation between individual stocks and the broader market, will collectively act as a buffer, expected to keep volatility at the index level moderate and suppress the depth of declines.

Seasonal Headwinds and the CTA "Time Bomb"

The "seasonal panic" of September has become a consensus among market participants.

Goldman Sachs reviewed records since 1928, showing that September is the worst month for the S&P 500 Index, with an average return of -1.17%. More alarmingly, the second half of September is the worst two weeks of the year, with an average return as low as -1.38%.

In such a fragile seasonal context, a more concerning signal has emerged. The CTA funds, which have been a significant driver of the market's rise over the past few months, have exhausted their purchasing power.

Goldman Sachs' model shows that the CTA's U.S. stock positions have reached a 100% "full position" level. This means they are no longer active buyers in the market. Their purchasing power has plummeted from $27.66 billion in July to $12.56 billion in August, and it is expected that the total U.S. stock purchases for September will further shrink to only $2.96 billion.

Once the market enters a downward channel in the coming month, CTA funds may be forced to liquidate, with the model estimating:

• In the next week: If the market declines into a downward channel, the CTA model will sell $22.25 billion of global stocks (of which $4.84 billion is U.S. stocks).
• In the next month: If the market declines significantly, the CTA model will frantically sell up to $217.92 billion of global stocks, of which $73.69 billion is U.S. stocks.

This asymmetric downside risk is a core variable that investors must pay close attention to in September.

Institutional Investors' Cautious Stance, but Moderate Positions May Cushion Declines

The report shows that institutional investors have net sold U.S. stocks for two consecutive months and are cautious about the upcoming September.

Despite the recent market rebound, Goldman Sachs' sentiment indicators remain negative, indicating that from a historical capital flow perspective, overall positioning remains relatively balanced, and most investor groups still have room to increase their positions.

Goldman Sachs believes that unless there is a significant fundamental shock, the current lukewarm positioning level will make any market declines relatively moderate.

It is noteworthy that hedge fund activities corroborate this cautious sentiment.

Although the net leverage of fundamental long-short strategy funds has surged sharply over the past few months, it remained flat in August, still below the year-to-date high in February. The net leverage of U.S. long-short strategy funds is only at the 32nd percentile over a 5-year dimension, below the average level, indicating a weak willingness to take directional betsTherefore, Goldman Sachs assesses that as long as there are no significant fundamental shocks, the current moderate position levels will make any market pullbacks relatively "mild and short-lived."

Market Divergence: Hedge Funds Rotate into Emerging Markets, Retail Investors Flock to Passive Funds

The report points out significant divergence among market participants.

Data from Goldman Sachs' prime brokerage business shows that hedge funds have rotated into emerging market stocks with unprecedented strength over the past month, led by Chinese assets.

The data indicates that the nominal net inflow into broader emerging markets and the Chinese market in August was three standard deviations above the ten-year average, entirely driven by long buying. Funds were primarily concentrated in Chinese tech stock ETFs and large-cap stocks like Alibaba.

This suggests that as U.S. stocks face challenges, global capital is actively refocusing and reallocating assets to other parts of the world.

Meanwhile, although retail investors are becoming increasingly active in individual stock trading, their main funds continue to flow faithfully into passive funds (such as ETFs).

This trend has intensified the divergence between active and passive funds, and due to the construction of ETFs, these funds remain highly concentrated in large tech stocks like the seven giants of U.S. tech.

Data shows that since 2019, the inflow into U.S. money market funds has reached $4.09 trillion, while the inflow into U.S. bond funds was $2.46 trillion, and the inflow into U.S. stock funds was only $247 billion.

This means that the amount flowing into money market funds is 16.5 times that of stock funds. Despite the rise in the S&P index, the reality of "cash is king" cannot be ignored.

Market "Stabilizers": Internal Structural Forces Suppress Volatility

Despite the challenging macro backdrop, the internal structure of the market provides some key "stabilizers."

First, dealers are in a record bullish gamma state. The exposure of options positions needing to be hedged has increased by $10.9 billion in 10 days, a historical high. This state means that dealers will act as "absorbers" of market volatility, buying when the market falls and selling when it rises, thereby keeping the index within a certain range and buffering sell-offs.

Second, market correlation is at a near 30-year low. This indicates that individual stock movements are highly divergent, and the market is no longer a "Beta market" where everything rises and falls together, but rather an "Alpha market" that relies on selective stock picking to profit. This aligns with the trend of institutions actively selecting stocks while retail investors continue to flock to passive funds.

Finally, volatility itself has dropped to "extremely cheap" levels. The one-month implied volatility of the S&P 500 index is close to a one-year low, indicating that options pricing is extremely cheap. Considering the dense macro event schedule in September, Goldman Sachs believes that the cost-effectiveness of using options for hedging is very high