US stocks rebounded as the trading week opened overnight. But I do not see this as a signal to buy the dip. It looks more like a pause in a selloff that has yet to run its course.
Why should we become more cautious just as prices start to recover? The answer lies in last week’s data, not in market sentiment. Until the selling has run its course, buying the dip means stepping into continuing selling pressure. With the trend still unclear, our position remains unchanged: stay patient and wait.
$China A50 Index - main 2610(CNmain)$ $HSI(HSI)$ $HSTECH(HSTECH)$ $Hang Seng Tech Index - main 2610(HTImain)$
Institutional Positioning Is Near a Five-Year Low
Last week’s selling in US equities was more intense than expected. Goldman Sachs’ flow data suggest that major institutions have been accelerating their sales of individual stocks, with holdings approaching year-end lows.
$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $E-mini S&P 500 - main 2612(ESmain)$ $Micro E-mini S&P 500 - main 2612(MESmain)$ $Cboe Volatility Index(VIX)$
Goldman’s latest measure of institutional US equity long/short net leverage plunged to 43.4%, leaving positioning close to its lowest level in five years.
$Invesco QQQ(QQQ)$ $NASDAQ(.IXIC)$ $E-mini Nasdaq 100 - main 2612(NQmain)$ $Micro E-Mini Nasdaq 100 - main 2612(MNQmain)$
Morgan Stanley’s US technology, media and telecommunications (TMT) momentum factor has fallen 62% from its peak—an unusually severe decline.
All three measures point to the same conclusion: last week’s selloff was far more aggressive than previously anticipated. That helps explain why the bearish tone remains so pronounced this week.
$NVIDIA(NVDA)$ $Micron Technology(MU)$
Gold’s Unusual Weakness Is a Major Warning Sign
Assets such as Bitcoin and gold, which can reflect changes in risk appetite, are often sold ahead of a major market correction as investors raise cash. That makes them vulnerable when liquidity pressures drive a broader selloff.
$Gold - main 2612(GCmain)$ $E-Micro Gold - main 2612(MGCmain)$ $1-Ounce Gold - main 2612(1OZmain)$ $SPDR Gold ETF(GLD)$
Both fell sharply last week, but gold’s performance was particularly striking. The Nasdaq declined 2.9%, the dollar weakened, and the 10-year US Treasury yield fell 17 basis points. Yet gold still dropped 2.8%. Factors that would normally support gold failed to provide any meaningful cushion.
$Silver - main 2612(SImain)$ $E-mini Silver - main 2612(QImain)$ $iShares Silver Trust(SLV)$
Morgan Stanley notes that the last comparable episode—a similarly large decline in Treasury yields accompanied by this kind of weakness in gold—was in December 2008.
When an asset fails to respond to several supportive factors at once, the warning becomes harder to ignore. Gold’s selloff is more troubling than the Nasdaq’s decline because it suggests something is wrong beneath the surface.
$Dow Jones(.DJI)$ $E-mini Dow Jones - main 2612(YMmain)$ $Micro E-mini Dow Jones - main 2612(MYMmain)$ $SPDR Dow Jones Industrial Average ETF Trust(DIA)$
CTA Selling: Even a Strong Rebound May Not Be Enough
Systematic trend-following funds, commonly known as CTAs, could be a major source of selling pressure this week.
Goldman Sachs’ latest model estimates that these funds may still hold $38.5 billion in long S&P 500 futures positions, putting their exposure above the 90th percentile of historical levels. The S&P 500 is already below its short-term trend threshold. The more important medium-term threshold sits roughly 1.3% below last Friday’s closing level.
In other words, a break below last week’s low could intensify selling.
Another set of figures makes the imbalance even clearer. Goldman’s model projects that CTAs would remain net sellers of $3.7 billion even if the market staged a two-standard-deviation rebound next week.
Over the following month, potential buying in a rising market is estimated at just $9 billion, compared with potential selling of as much as $65 billion in a falling market.
The contrast between $9 billion and $65 billion shows how heavily the potential flows are skewed to the downside. This is no longer simply our assessment; it is an imbalance quantified by the model. It also explains why a rebound at the start of the week is not enough to change the outlook.
What Deutsche Bank’s Relative-Performance Chart Shows
Selloffs unfold in stages, and this one may not be finished.
Deutsche Bank’s data show a clear divergence in early October between large-cap US technology stocks and the rest of the market. Large technology stocks came under heavy selling pressure, while the remaining index constituents broadly recovered.
$iShares Russell 2000 ETF(IWM)$ $Philadelphia Semiconductor Index(SOX)$ $iShares Semiconductor ETF(SOXX)$
That divergence supports my earlier view: the major indexes may remain range-bound ahead of the midterm elections, even as technology stocks have potentially passed an interim peak.
More importantly, Deutsche Bank’s ratio of the large-cap technology index to the index excluding those stocks shows a consistent pattern in its upward trend. Even if the current technology selloff is following historical patterns, it may still have further to run. There remains room for additional downside.
This Week’s Two Key Events: Earnings and the FOMC
This week brings a heavy schedule of earnings releases. Several of the technology companies reporting are central to the AI investment theme. Their revenue figures will directly influence expectations for the sector’s future growth and, in turn, share prices.
With so many potential sources of disappointment, waiting makes sense. Let the results come out before deciding how to position.
The Federal Open Market Committee also meets this week, on Tuesday, October 27, and Wednesday, October 28. The rate decision is scheduled for 2:00 p.m. Eastern Time on October 28, or 2:00 a.m. Beijing time on October 29. The Chair’s press conference follows at 2:30 p.m. Eastern Time, or 2:30 a.m. Beijing time.
I expect earnings to have the greater market impact. Earnings outcomes lack the same clear market-implied benchmark available for monetary policy. Expectations for the FOMC are continuously priced through interest-rate derivatives, including federal funds futures, swaps and Eurodollar futures.
A decision to leave rates unchanged this week is already largely priced in. The market expects an October pause, while expectations for a December hike remain strong.
The next move in Treasury yields also deserves close attention. Bloomberg’s figures showed a sharp decline in open interest in CME US Treasury futures last Friday. The substantial position closures suggest growing disagreement over the outlook.
$iShares 20+ Year Treasury Bond ETF(TLT)$ $US10Y(US10Y.BOND)$
Both two-year and 10-year Treasury yields are still trending lower, yet institutions are closing positions at these levels. I do not view that as a positive signal. It suggests that investors are no longer pressing their bets on lower yields and are instead moving to the sidelines. The decline in yields could therefore lose momentum.
Key Levels: The 120-Day Moving Average and 4.85%
On the technical side, the key level to watch is the 120-day moving average of the continuous front-month S&P 500 futures series.
The chart must be adjusted for contract rolls, either through back-adjustment or another method that removes the price discontinuities caused by switching contracts. Only then does a break below the 120-day moving average provide a meaningful signal.
A break would mark a downside exit from the current trading range and open the way for a further decline. Combined with the head-and-shoulders top shown above, that would create a distinctly bearish technical setup for the S&P 500.
This Week’s Strategy: Trade Volatility Rather Than Direction
The principle this week is to watch more and trade less, with a conservative approach throughout. The task is not to guess direction but to establish strict entry conditions.
I will not sell deeply out-of-the-money puts this week. The risk is too high. Instead, the focus is on a rise in volatility.
For a directional volatility trade, I would wait for the VIX to retreat to 16 or 14.8 before establishing exposure to a rebound. $Cboe Volatility Index(VIX)$ $VIX Volatility Index(VVIX)$
The straddle strategy also has a specific trigger. If continuous S&P 500 futures break below their 120-day moving average, consider buying an at-the-money straddle on a Nasdaq-tracking ETF such as QQQ: buy a put and a call with the same strike and expiration, with at least 10 days remaining until expiry. The aim is to benefit from the rise in volatility accompanying a substantial market correction.
Gold offers another potential breakout trade. It is currently close to breaking below a long-term technical support line
If that support fails, the decline should accelerate. GLD would be the preferred vehicle for the straddle. For example, buying an at-the-money put and call at the $365 strike would create a position that could become profitable if GLD falls below $355 or rises above $375.
The preferred entry would be after gold futures decisively break below $4,000, or after a rebound carries them back above their 20-day moving average. Once the market establishes a direction, the move should accelerate.
Both the gold straddle and the strategy of buying a pullback in volatility require strict entry conditions. If a larger-than-expected correction materializes, using a long straddle to benefit from rising implied volatility is much safer than taking an outright short position.
Until a short-term trend is established, patience is a position in itself.
$Silver - main 2612(SImain)$ $iShares Silver Trust(SLV)$ $E-mini Silver - main 2612(QImain)$
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