In his latest weekly Tactical Fund Flow note, Goldman flow trader Scott Rubner writes that "the number #1 incoming question to hit my desk this weekend: "What happens if we return from Labor day holiday and there is a MELT-up, not MELT-down." Why is this the most pressing question among Goldman clients? Simple: most of them are positioned bearishly, and as Goldman reveals, the bank's sentiment indicator just hit the lowest level in 63 weeks, meaning continued upside will lead to even more institutional and hedge fund pain, coupled with even more short squeezes.
The thread below from Rubner explain why the market's relentless meltup is now steamrolling countless funds who were certain there would be a correction by now:
1. GS sentiment indicator is the lowest level in 63 weeks, that is over 1 year. A rally higher (the UP-Crash) would not be welcomed and may lead to a quick right tail hedging.
2. GS sentiment indicator reached a reading of -0.2 as of Friday. This pulls in 9 different positioning and sentiment indicators, its broad based.
3. This is the lowest reading since May 22nd 2020. This was the low point for the cycle. This was 63 weeks ago.
4. The current Sentiment Indicator percentile ranking, since 2009 is in the 34th percentile. This is down from a 98.2% percentile ranking on March 15th. Sentiment has grinded lower since March. I think a move in either direction will be unwelcomed, but I continue to think that an upside move from here would be the most painful.
5. This is consistent with the reading from GS Prime Brokerage:
- a) Last week, the GS Prime book saw the largest $ net selling in four months (-1.9SDs), driven by short sales outpacing long buys 10 to 1. Both Single Names and Macro Products (Index and ETF combined) were net sold and made up ~70%/30% of the $ net selling.
- b) Overall book Gross leverage fell -1.5 pts to 238.4% (52nd percentile one-year), while Net leverage fell -1.7 pts to 84.5% (32nd percentile one-year).
- c) Fundamental L/S Gross leverage fell -1.1 pts to 172.9% (18th percentile one-year), while Fundamental L/S Net leverage fell -2.2 pts - the largest decrease in more than three months - to 63.3% (36th percentile one-year).
6. This is also consistent with AAII survey which showed more bears than bulls for the first time this year or CNN Fear and Greed Index = 22 reading "extreme fear". Also institutional global wall street "inboxes" were hit with "EXTREME NEGATIVE GAMMA FLIP" emails last week which added to the negative sentiment/quick macro shorting of IWM/EEM, etc.
7. This is what surprised me last week (but at this point should not come as any surprise).
- a) Over the last 25 years August is historically the largest month for equity OUTFLOWS. We have seen none of these outflows and it has been buying the dip (TINA).
b) There was +$24B worth of equity inflows last week (during the dip), increasing from +$16B the week prior. August has seen INFLOWS of $45B MTD. (context?).
c) August normally the slowest month of the year, logged more inflows MTD (August 2021) than 13 out of the past 20 FULL YEARs.
d) US Equity inflows last week were the largest in 9 weeks (+$13B).
8. What I am watching for the next two weeks is the trading by retail investors, I think institutional trading will be slow after the 15 month grind.
- a) There are no vacation days for retail, quite the opposite.
- b) In august, option volume notional is 120% of stock volume notional. As institutional shares volume declines this month, option volumes have not. We saw this with MSFT on Friday (1 day calls)
- c) 75% of options traded have a time expiry of two-weeks or less. Given high gamma, low shares volume, retail is having a larger impact paired up with passive inflows.
Goldman's Bottom Line: "If the Jackson Hole event gives the greenlight to September 22nd (Sept FOMC), there are a lot of holidays in between. I expect extreme UN-STRECHED positioning to start to get reversed to a more neutral (and not short) position."