Beneath a calm surface, the US stock market is undergoing a structural rupture.
Goldman Sachs derivatives trading head Brian Garrett issued a warning: the US equity market "refuses to price in any panic." The Goldman Sachs Panic Index closed below 1 last Friday, and the VIX remained in the low teens, yet at the same time the MOVE index, a measure of bond volatility, sits at an extreme high around the 100th percentile 鈥?a divergence between the two that is sending a rare structural warning signal to the market.
Even more alarming is the collapse in breadth within the US equity market. Among S&P 500 constituents, fewer than 50% are trading above their 200-day moving averages; the number of stocks hitting 52-week lows has exceeded the number hitting 52-week highs for nine consecutive trading sessions 鈥?the simultaneous triggering of these two indicators is the first occurrence since the peak of the 2000 dot-com bubble. At the same time, the median S&P 500 stock has fallen 16% from its 52-week high, while the index overall remains near its highs thanks to the strength of AI-related mega-cap leaders, creating a severely "hollowed-out index" pattern.
Hedge fund behavior also confirms this split: according to the latest Goldman Sachs Prime data, total leverage for US long-short funds has risen to 210.6% (42nd percentile over one year), while net leverage has fallen to 48.6% (5th percentile over one year) 鈥?institutions are adding exposure while heavily hedging, reflecting a highly contradictory mindset of "adding exposure without adding directional bets."
AI Props Up the Facade, While Most Stocks Are Already in a "Bear Market"
Goldman Sachs partner and head of Americas equity execution services John Flood pointed out that the strength of the AI sector is masking broad deterioration within the US equity market. The median S&P 500 stock is down 16% from its 52-week high, while the index itself remains near record highs 鈥?a divergence that has dragged market breadth to its lowest level since the dot-com bubble.
Specific data shows that about 70% of S&P 500 constituents are currently trading below their 50-day moving averages, while the proportion of constituents above their 200-day moving averages has fallen below the key 50% threshold. The AAII retail bearish ratio is close to 50%, indicating market sentiment is already in a clearly pessimistic range.
The Goldman Sachs US Equity Sentiment Indicator has fallen to -0.9, matching the reading at the market's interim low in March of this year.
However, this pessimism has not been transmitted to volatility pricing. Garrett explicitly stated that the equity market "refuses to price in any panic" 鈥?the Goldman Sachs Panic Index closed below 1, and single-stock implied volatility also failed to effectively reset to higher levels after the late-July selloff.
Extreme Divergence Between VIX and MOVE: The Bond Market Is Already "Screaming"
The most notable structural anomaly in the current market is the extreme divergence between equity volatility and bond volatility.
Garrett noted that the MOVE index (which tracks US bond market volatility) is currently at an extreme historical level around the 100th percentile, and the credit default swap index (CDX) is likewise in a "peak panic" range; but at the same time, the VIX is still trading in the low teens. The bond and credit markets are already pricing in tail risk, while the equity market remains calm.
Looking at credit market details, Goldman Sachs investment-grade credit colleague Brad Shelofsky pointed out that investment-grade bond all-in yields have risen to multi-year highs, and yields themselves are attractive, but the spread as a proportion of all-in yield is at a low level 鈥?at a spread level of +80 basis points, it is difficult to generate a strong urge to go long the index. The rapid pace of rate increases will suppress demand and trigger concerns about fund outflows 鈥?although last week still recorded $1.8 billion in net inflows, overall market conviction remains low.
In addition, CCC-rated credit spreads have widened on 11 of the past 14 trading days, approaching 2022 levels; investment-grade technology sector CDS spreads have also widened to their widest since 2023. Garrett said this dynamic "genuinely frightened investors during the summer, and whether it can play out again remains to be seen."
The Ghost of 2000: Historical Precedent and Potential Risks
BTIG chief technical market strategist Jonathan Krinsky, building on the analysis by Flood and Garrett, further pointed out that the simultaneous triggering of the current two breadth indicators is a combination that has not appeared since 2000.
Since 1990, there have been only 25 trading days with the combination of "fewer than 50% of S&P 500 constituents above their 200-day moving averages while the index itself is near a 52-week high," and all 25 of those trading days were concentrated between 1998 and 2000. The 1998 instance occurred after a -22% drawdown and was not a top signal; but the readings from late 1999 to early 2000 are more cautionary 鈥?that was precisely the peak zone of the dot-com bubble.
Historical review shows that from July 1999 to February 2000, the equal-weighted S&P 500 fell about 16% while the market-cap-weighted S&P 500 rose about 8%; afterward the two swapped roles, with the S&P 500 falling 17% later that year while the equal-weighted index rebounded 20% over the same period. The core question Krinsky raised is:
Will history repeat itself this time, with breadth and the equal-weighted index stabilizing ahead of the broader index, followed by a catch-down in the main index?
Krinsky also noted that there have now been 213 consecutive trading sessions without a "high-correlation selling day" in which NYSE down-volume exceeded 80% of total volume. Historically, an average of 21 such trading days occur per calendar year, and there has never been a year with fewer than 5. He believes that persistent sector rotation, while preventing concentrated selling with correlations approaching one, means "the clock is still ticking."
Hedge Funds: Adding Leverage but Not Direction 鈥?A Concentrated Contradictory Signal
The positioning structure of hedge funds is the most direct mapping of the current market's contradictory mindset.
According to the latest Goldman Sachs Prime data, total leverage for US long-short funds rose 1.2 percentage points last week to 210.6% (42nd percentile over one year), while net leverage fell 1.2 percentage points over the same period to 48.6% (5th percentile over one year). Rising total leverage means institutions are increasing market exposure, while falling net leverage means longs and shorts are expanding simultaneously, with no increase in directional bets.
Garrett summarized this phenomenon as:
"Total leverage is rising, net leverage is relatively contained 鈥?institutions are adding exposure, but not adding directional conviction."
The US fundamental long-short ratio (market-cap basis) fell 1.5% over the same period to 1.601, at the 3rd percentile over one year, further confirming institutions' high degree of caution on direction.
Garrett noted that on market rally days, one can "feel" the market's underweight positioning 鈥?when the Nasdaq 100 hit a record high last Monday, bullish option implied volatility clearly outperformed, indicating that upside options were actively bought, but given the cost of carry, these options are not "expensive." He believes this pattern is driving "chase-the-rally" behavior at the single-stock level and could spread to the index level.
Three Scenarios: Good, Mediocre, or Ugly?
Faced with the above signals, strategists within Goldman Sachs and in the broader market have offered three clearly divergent scenario assessments.
On the optimistic scenario, Flood believes that the current extremely pessimistic sentiment and underweight positioning themselves constitute a potential upside catalyst. He stated that "these factors together point to the potential for broad market upside and a 'catch-up' rally in recently lagging stocks, provided macro uncertainty does not intensify further."
On the neutral scenario, Garrett believes "the market's current positioning structure is suited to a choppy risk environment," but acknowledges that "although everyone is watching the same risks, almost nothing can truly knock down the US equity index." He lists the potential catalysts before year-end as the midterm elections, tech earnings, or an easing of Middle East tensions, and concludes with a popular market saying: "The market never gives an 'all-clear' signal without making you pay the price of missing out."
On the pessimistic scenario, Krinsky's conclusion is the most direct: "Something's gotta give." He believes that if the Iran situation eases, the hardest-hit sectors (consumer discretionary, financials, REITs, utilities) will rebound first, while technology and AI sectors may lag relatively; but if a high-correlation selling day eventually arrives, the current breadth deterioration will serve as a leading indicator of a larger-scale correction.
Comments