Funds are buying stocks – or are they?

Goldman Sachs has published an insightful report indicating that US stock purchases have increased at their fastest pace in 6 months. Does this signify unequivocal enthusiasm among institutional investors for the US stock market?

Market sentiment is deeply uneven; market purchases are primarily ETFs and stocks. However, an important detail not easily found in the report, as Bloomberg analyses indicate, is that stock purchases are largely "short cover" trades, meaning buying shares to limit losses from short positions (selling).

The local peak for long positions (open interest) among asset managers (according to TFF) occurred in 2024, when it stood at approximately 27%. A few months ago, it was still nearly 25%, but today it has fallen to around 15%.

Based on Goldman Sachs data, three negative trends are visible across three different sectors.

• Finance - Allocation has increased sixfold, yet total allocation remains at 5-year lows. Importantly, almost the entire exposure to the sector consists of banks.
• Industry - Pessimism persists regarding American industry. Net declines were seen in 7 out of the last 8 weeks, and short positions in this sector are at their highest since 2024.
• Semiconductors - Following fantastic gains, many institutions (including Goldman) declared they were liquidating a large portion of their positions in this industry.

Does this mean inevitable declines?

No, although it points to a clear problem. The properties and conditions present in today's derivatives market ensure that corrections are shallow and gains are pronounced.

Low "paper" volatility masks real risks. Fund managers remain positive, but this sentiment is running out of fuel. Currently, the market lives on increasingly unrealistic dreams of a swift end to the conflict in Iran and increasingly esoteric returns on AI investments.

Given the indicators and current levels, the market is currently exposing itself to a devastating correction the moment the target macroeconomic scenario clearly changes.

VIX (D1)

The volatility index (VIX) is currently indicating the lower limit of the channel in which it has been moving since around 2024. Source: xStation5