US stock markets have experienced a relentless rally since late March, giving investors numerous reasons to feel cautious. However, according to traders at Goldman Sachs Group, extreme crowding is not at the top of their list of concerns.
The firm's composite sentiment indicator, which tracks exposures to US equities from institutions, retail investors, and foreign investors, is currently hovering around 0.2, suggesting positioning is at a neutral level. In a note to clients, Goldman traders led by Tom Shea wrote that this "indicates market participants are not fully embracing the rally."
Despite the sustained accumulation of optimistic sentiment in US stocks, this data suggests that an excessive condition—which typically leaves little room for error—is not currently present. Dave Mazza, CEO of Roundhill Financial Inc., commented:
"If we haven't seen a frenzy of buying on the way up, it's unlikely we'll see a stampede for the exits if sentiment turns, suggesting this rally may not be as feverish as it appears."
Several factors may explain the absence of crowding in US stocks. In Mazza's view, with the market up 16% since late March (as of Thursday), large funds may be reluctant to chase prices higher.
Max Gokhman of Franklin Templeton Investment Solutions pointed out an imbalance in hedge fund positioning: they have significant exposure to artificial intelligence-related stocks but are lightly positioned in other areas. Data compiled by Goldman Sachs shows hedge funds' net leverage (long minus short) is at its highest level in a year.
"Hedge funds are jumping over the wall of worry with leverage, while institutional investors wait to see how the more exuberant investors land on the other side," Gokhman said.
Options Market Previously Showed Signs of Exuberance; Sentiment Shifted Friday
Nevertheless, even if this US stock rally scores low on measures of crowding or investor "positioning density," signs of exuberance have been hard to ignore. In the options market, demand for protective strategies has nearly vanished, with investors seemingly more concerned about missing the upside than hedging against a downturn.
Goldman's Panic Index—which combines measures like the CBOE Volatility Index (VIX), the VVIX (which gauges volatility of the VIX), and at-the-money volatility—closed last week near a two-year low.
The skew for S&P 500 Index options, a closely watched gauge of demand for downside protection, has fallen to an 18-month low as put options have become cheaper and call options more expensive.
Market sentiment shifted on Friday due to stronger-than-expected US employment data, which boosted expectations for Federal Reserve interest rate hikes, and signs that US-Iran talks regarding a temporary peace agreement were making little progress.
Simultaneously, sentiment was also dampened by S&P Dow Jones Indices' decision to maintain its inclusion criteria for benchmarks like the S&P 500, rejecting a proposal that would have allowed large-cap stocks to be added to the index more quickly after their initial public offerings.
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