Goldman Sachs Warning: "Extreme Hedging" Panic Lurking Behind US Stock Market Plunge

On November 21st, John Flood, a partner at Goldman Sachs, pointed out that the significant reversal of the US stock market on Thursday demonstrated that Nvidia's remarkable performance did not convey the anticipated "risk-off" signal to traders. Instead, it prompted them to hastily build defenses to avoid further losses. The US stock market opened strongly on Thursday morning but quickly took a turn for the worse. In the first hour of trading, the S&P 500 index surged by 1.9%. However, it reversed into a decline before 1 p.m. local time. This was a record intraday swing since the market turmoil in April, causing more than $2 trillion in market value to evaporate from the day's peak. The index closed below the 100-day moving average for the first time in months, and the VIX fear index jumped above 26. This violent reversal occurred against the backdrop of Nvidia's release of a historic financial report, driving traders crazy as they sought explanations. Various theories emerged. Some pointed to the mixed signals in the September nonfarm payroll report, raising doubts about the Fed's ability to cut rates. Others were concerned about overvaluation, while still others focused on technical developments that might continue to trigger selloffs by momentum funds. "The market is now filled with old wounds," Flood wrote in a client report. "The market is extremely focused on hedging 'crowded risks,' and investors have entered a pure profit and loss protection mode." Goldman Sachs' trading desk observed a surge in short-selling activity in the macro products space, including trading platform funds, custom baskets, and futures. Flood pointed out that since 1957 (including Thursday), there have been eight cases where the S&P 500 surged by more than 1% at the open but closed down. On the positive side, historically, after such events, the market has performed well, with an average gain of at least 2.3% the next day and week and an average increase of 4.7% in the following month. "These reversal events will prompt investors to re-examine their risk exposure," Flood concluded. (Jin10)