"Buyer fatigue" sweeps into the US stock market! "Good news fully priced in" may trigger a sharp short-term sell-off

According to Zhitong Finance APP, as institutional and retail investors retreat from their previously strong bullish positions, the remarkable rally of the U.S. stock market since its low in April and the recent record highs of the "bull market momentum" seem to be facing significant risks. According to RBC Capital Markets, a major investment institution on Wall Street, the U.S. stock market bull run appears to be encountering the major challenge of "buyer fatigue," facing ongoing downside risks in the short term, particularly the need to be wary of sell-offs triggered by "good news being fully priced in."

Coincidentally, another Wall Street financial giant, JPMorgan Chase, also stated that if the Federal Reserve announces an interest rate cut at its meeting on September 17 as expected, this market has already priced in good news, which may instead become a catalyst for investors to take profits and temporarily exit their bullish positions in U.S. stocks. Andrew Tyler, the global market intelligence head at JPMorgan Chase, emphasized that the anticipated interest rate cut by the Federal Reserve in September could put the brakes on the soaring bull market in U.S. stocks.

So far this year, the S&P 500 index has set more than 20 historical highs, rebounding over 30% since the low in April, and U.S. stock investors have undoubtedly shown strong resilience. However, as the impact of tariffs on prices begins to manifest, coupled with extremely weak employment data recently fueling recession expectations, and the Trump administration's ongoing threats to the independence of the Federal Reserve's FOMC monetary policy, investors are on edge ahead of the Federal Reserve's interest rate decision.

RBC's Cautious Logic: Buyer Fatigue

According to statistics compiled by RBC, the inflow of funds into U.S. equity funds has been relatively weak compared to the beginning of the year, although it has managed to return to positive territory. Meanwhile, the flow of funds from U.S. and European investors into U.S. and non-U.S. registered equity funds has also begun to weaken, and while global fund inflows excluding the U.S. market are still positive, they have also shown a deteriorating trend.

"When we take a broader view, we believe this indicates a clear sign of buyer fatigue," Lori Calvasina, head of U.S. equity strategy research at RBC Capital Markets, wrote in a report sent to clients on Monday.

Calvasina's concerns focus on the overall high stock valuations, the cooling of bullish sentiment, and seasonal weakness—historically, September is the worst month for annual returns of the S&P 500 index.

"More importantly, within U.S. equity funds, retail fund flows have recently declined." Calvasina added. Specifically, according to RBC's statistics, the passive inflow of funds from retail investors into U.S. equity funds is turning negative, reversing the previously strong positive inflow In recent years, financial giants on Wall Street have increasingly focused on the behavior of retail investors and statistics on retail fund flows, as this group has become a key driver of the so-called "meme stocks" and the broader market rally. It is the continuous wave of buying on dips by global retail investors that has significantly propelled the S&P 500 index to rebound sharply from the severe sell-off triggered by Trump's tariff policy in early April, repeatedly setting new historical highs.

A stock overall positioning indicator from Deutsche Bank has retreated slightly over the past three weeks but remains just above the "neutral" benchmark. Professional portfolio managers are now slightly underweight, having adjusted down from the previous "neutral" stance. Deutsche Bank's strategist team wrote in a report on Monday that "quantitative fast money"—those adept at trading derivatives using systematic strategies, namely Commodity Trading Advisors (CTAs)—significantly reduced their long exposure in U.S. stocks last week, particularly in the S&P 500 and Nasdaq 100 indices.

After a decline on Friday due to weaker-than-expected non-farm payroll data, U.S. stocks rose on Monday. As traders collectively bet that the Federal Reserve will cut interest rates next week, the S&P 500 index rose 0.2% to 6,495.15 points, just a few points shy of its historical closing high of 6,502.50 points set on Thursday.

However, investment institutions including RBC and JP Morgan have recently warned that the Federal Reserve's monetary policy decision next Wednesday could evolve into a significant event of "selling the news," where investors may sell stocks after the central bank announces its monetary policy path.

JP Morgan's global market intelligence team pointed out that retail investor participation typically tends to decline in September. Meanwhile, JP Morgan emphasized that the number of large companies conducting stock buybacks also decreases during the quiet period before third-quarter earnings reports—while large-scale stock buybacks by tech giants like Apple and Meta have been one of the key supporting forces of this bull market in U.S. stocks.

The options market is also reminding investors to remain cautious, especially regarding highly valued large tech giants.

The options market is sending warning signals about this strong rally, at least in the short term. Last week, the five-day average of total net trading volume of call options, which give investors the right to buy underlying stocks, showed a decline. Deutsche Bank strategist Thatte added that this indicator (calculated by subtracting put option volume from call option volume) has declined mainly due to a drop in single-stock contracts, with related volume falling to its lowest point in a month.

Notably, compared to small-cap stocks, investors are becoming increasingly bearish on large-cap stocks in the U.S. market, especially the tech giants whose valuations have reached historical highs. According to statistics from Cboe Global Markets, the so-called "skew" tracking the S&P 500 and Nasdaq 100 index ETFs has turned steep, while the same indicator tracking the small-cap benchmark—Russell 2000 index ETFs—has flattened, indicating that traders generally believe that super large-cap stocks like Nvidia, Microsoft, and Tesla carry a greater degree of downside risk

"As the market's hedging demand increases, the skew is indeed continuing to steepen," wrote Mandy Xu, Head of Market Intelligence at Cboe Derivatives Exchange, on Monday