Attention! Hedge funds have started shorting US stocks.

Last week, both the S&P 500 and the Dow Jones Industrial Average closed at record highs. However, a report from Goldman Sachs pointed out that amidst the bullish sentiment, smart money is shorting the US stock market.

Goldman Sachs stock analyst William Hosbein noted that as of last week, high-quality, long-term growth stocks in the US have outperformed low-quality, unprofitable stocks. Blue-chip stocks have shown their best monthly performance compared to unprofitable stocks (GSPUMENP), and high-growth, high-profit stocks are expected to achieve their best monthly performance compared to low-growth, low-profit stocks (GSPUHGMP). Hosbein commented that investors can never have enough pursuit of quality.

However, as the stock market reaches new highs, Goldman Sachs' sentiment indicator declined again last week, consistent with the data from the Prime Brokerage (PB) division, which showed that hedge funds and long-only strategy funds were selling.

Goldman Sachs warned that the increase in layoffs since the beginning of the year may lead market participants to resume risk-taking. Goldman Sachs stated that in the past ten non-farm payroll reports, data has been revised downward nine times. The average monthly increase in employment in 2023 is 56,000, more than twice the average monthly level in 2022. In addition, temporary positions have contributed to a continuous decline in employment in the service industry for 11 consecutive months, with a total reduction of 346,000 since reaching its peak in March 2023. Prior to the global financial crisis, temporary employment had declined for 17 consecutive months.

Goldman Sachs' trading division found that "the bears have fearlessly stared at the historic highs of the stock market," and stated that in January, "skeptics of the stock market have heavily shorted." Data from Goldman Sachs' PB team showed that last week, the ratio of short positions to long positions in the US stock market was 2:1, and the ratio since the beginning of the year is 3:1.

The following screenshots show that since the beginning of the year, the Japanese stock market has been the top performer, with an accumulated increase of nearly 7.5%, while chip stocks and blue-chip technology stocks have risen by about 7%.

Last week, Wall Street News mentioned that the speeches of several Federal Reserve officials last week suppressed expectations of a rate cut in the near future. Coupled with strong economic data such as retail sales, both the probability of a rate cut by the Fed starting in March and the expected magnitude of rate cuts for the whole year of 2024 have decreased. However, the US stock market, especially the technology sector, has found new reasons to rise: the market is starting to digest lower rate cut expectations while also digesting stronger economic growth.

In theory, a resilient economy is favorable for small-cap and value stocks, but last week they still underperformed, with the small-cap index Russell 2000 falling 0.34% for the whole week, marking its fourth consecutive week of decline.

Although a higher interest rate structure poses a threat to the valuation of risk assets, technology stocks that can provide sustained profit growth throughout the cycle have once again won favor in the market.

Some analysts believe that the ultimate fate of the US stock market still depends on the number of rate cuts by the Federal Reserve. Jim Caron, Co-Chief Investment Officer at Morgan Stanley Investment Management, believes that if the number of rate cuts this year is less than six, bond yields will naturally rise. Currently, there is a high correlation between stocks and bonds, and this will put pressure on the stock market.

Analyzing the previous ten rate cut cycles by the Federal Reserve since 1984, traders at Goldman Sachs predict that after this rate cut by the Federal Reserve, the US stock market will continue to rise. Yields tend to decline when easing begins, but after the first rate cut, the future decline in yields will be more limited. The yield curve tends to be steep initially and then flatten out. The US dollar is expected to strengthen, at least over time. However, once the economy inevitably enters a recession, these trends will reverse.