Recently, the US stock market has repeatedly reached new highs, however, a month ago, the market had already shown some abnormal signs.

The financial blog ZeroHedge pointed out that the movements of Institutions are contrary to those of retail investors. Retail investors show enthusiasm for chasing prices, while institutional investors (especially hedge funds) are quietly Short Selling.

In this regard, Goldman Sachs’ derivatives strategist John Marshall pointed out that the financing spread is an important Indicator for measuring the positions of professional investors. In mid-November, the financing spread hit a ten-year high before falling back and then rebounding, which was interpreted as a bullish signal. On December 18, the Fed's hawkish shift led to a plunge in the financing spread, wiping out the gains of the past six months.

Goldman Sachs believes that the sharp decline in the financing spread indicates that institutional investors are continuously reducing their Shareholding, which is an important warning signal. This week's sell-off through the Futures channel and the decline in financing leverage long costs confirm this. This is similar to the situation in December 2021, suggesting that the US stock market may face a risk of decline.

Goldman Sachs: The financing spread indicates that the US stock market may undergo a significant correction.

ZeroHedge pointed out that as early as several weeks ago, the market had already shown some abnormal signs: while the S&P Index continually reached new historical highs, 0DTE Options Trading was unusually active, Share Buyback surged, and retail investors also displayed enthusiasm for chasing prices.

Meanwhile, the movements of large Institutions are completely different from those of retail investors. By observing the financing spread of the S&P 500 Index, the AXW spread reversed after hitting a ten-year high on November 15, and then began to rise again.

In this regard, Marshall pointed out that the financing spread is an important indicator for measuring the allocation of professional investors.

In mid-November, the financing spread sharply reversed after hitting a ten-year high, and then began to rise again. Marshall believed at the time that this indicated that professional investors' interest in rising stocks had not diminished, serving as a bullish signal for the recent stock market performance. It proved to be true, as the S&P 500 Index continued to rise in the next two weeks.

However, on December 18, the Federal Reserve's hawkish shift broke the market's calm. "Political Powell" changed his prior dovish tone, hinting that the rate hike would exceed market expectations, leading to a collapse in the financing spread, erasing six months of gains within two weeks.

If the surge in the financing spread is a bullish signal, does its collapse mean a bearish signal? Marshall provided a definitive answer in his latest report on January 5.

He pointed out that the signs of continuous shareholding reduction by Institutions are an important warning signal for stock investors. This week, the sell-off through Futures channels is still ongoing, and the decline in the cost of financing leveraged long positions confirms this.

He emphasized that the softness of the financing spread on Thursday is an important event, indicating that the market trend in December is not solely influenced by year-end factors. Even with the S&P Index rising 1.3%, the financing spread on Friday performed flat, which is clearly inconsistent with normal market correlations.

More concerningly, Marshall believes that the current situation is very similar to December 2021. At that time, concerns about monetary policy triggered a sell-off by professional investors, which led to a 10-month decline in the S&P Index.

Is the accelerated sell-off of US stocks by hedge funds a warning or a short trap?

Another trader from Goldman Sachs, Vincent Lin, also reported on January 3 that in the past five trading days, hedge funds have net sold US stocks at the fastest pace in over seven months.

Data shows that there has been the largest net sell-off in the global stock market in over seven months, with short sell transactions far exceeding long sells. Net selling occurred in all regions, while the net sell amounts in North America and Asia's Emerging Markets were relatively small. Both macro products and individual stocks experienced net selling. Among the 11 sectors globally, 8 sectors saw net selling, with Medical Care, Financials, and Industrial sectors leading the way.

Marshall concluded:

"Although stock valuations have been at historical highs for many years, this is the first time in many years that we have seen large-scale selling in these two positioning indicators."

However, there is also a view that unless major macro factors trigger a large-scale sell-off, this round of sell-off may ultimately evolve into another large-scale short squeeze by hedge funds, which may instead drive the S&P 500 Index to new highs.