Recently, the U.S. stock market has repeatedly hit new highs; however, a month ago, the market had already shown some unusual signs.
The financial blog ZeroHedge pointed out that the movements of institutions are contrary to those of retail investors. Retail investors have shown enthusiasm for chasing gains, while institutional investors (especially hedge funds) have been quietly shorting.
In this regard, Goldman Sachs' derivatives strategist John Marshall noted that the financing spread is an important indicator of professional investors' positions. In mid-November, the financing spread reached a ten-year high before retreating, then rebounding again, which was interpreted as a bullish signal. On December 18, the Federal Reserve's hawkish shift led to a sharp drop in the financing spread, erasing the gains of the past six months.
Goldman Sachs believes that the sharp decline in the financing spread indicates that institutional investors are continuously reducing their holdings, which is an important warning signal. This week, the sell-off through futures channels and the decline in the cost of financing leverage for long positions confirmed this. This is similar to the situation in December 2021, suggesting that the U.S. stock market may face a risk of decline.
<h2>Goldman Sachs: Financing Spread Indicates U.S. Stocks May Face Significant Correction</h2>
ZeroHedge pointed out that as early as a few weeks ago, the market had already shown some unusual signs: while the S&amp;P index continued to set historical highs, 0DTE options trading was abnormally active, stock buybacks surged, and retail investors also showed enthusiasm for chasing gains.
Meanwhile, the movements of large institutions were completely different from those of retail investors. By observing the financing spread of the S&amp;P 500 index, the AXW spread reversed after reaching a ten-year high on November 15 and then began to rise again.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e5739064-7468-4d36-9323-2ee682f992bc.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e5739064-7468-4d36-9323-2ee682f992bc.png"/>
In this regard, Marshall pointed out that the financing spread is an important indicator of professional investors' allocations.
In mid-November, the financing spread sharply reversed after briefly reaching a ten-year high, and then began to rebound. Marshall believed at the time that this indicated that professional investors' interest in rising stocks had not diminished, serving as a bullish signal for the recent stock market performance. It proved to be true, as the S&amp;P index continued to rise in the following two weeks.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/574de486-2cb6-4d49-8a76-cf664cd58c35.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/574de486-2cb6-4d49-8a76-cf664cd58c35.png"/>
However, on December 18, the Federal Reserve's hawkish stance disrupted the market's calm. &#34;Political Powell&#34; changed his previous dovish tone, suggesting that the rate hike would exceed market expectations, and the financing spread subsequently collapsed, erasing the gains of the past six months within two weeks.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3fe5ce37-3400-4605-9c61-f8002190b514.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3fe5ce37-3400-4605-9c61-f8002190b514.png"/>
If the surge in the financing spread is a bullish signal, does its sharp decline mean a bearish outlook? Marshall provided a definitive answer in his latest report on January 5
He pointed out that the signs of continuous reduction by institutions are an &#34;important warning signal for stock investors.&#34; The sell-off through futures channels is still ongoing this week, and the decline in the cost of leveraged long positions confirms this.
He particularly emphasized that the weakness in financing spreads on Thursday is an important event, indicating that the market trend in December is not merely influenced by year-end factors. Even with the S&amp;P index rising by 1.3%, the financing spread on Friday performed flat, which is clearly inconsistent with normal market correlations.
More concerning is that Marshall believes the current situation is very similar to December 2021. At that time, concerns about monetary policy triggered sell-offs by professional investors, and subsequently, the S&amp;P index fell for 10 months.
<h2>Are hedge funds accelerating the sell-off of U.S. stocks a warning or a short trap?</h2>
Another Goldman Sachs trader, Vincent Lin, also released a report on January 3, stating that over the past five trading days, hedge funds have net sold U.S. stocks at the fastest pace in more than seven months.
Data shows that the global stock market has experienced the largest net sell-off in over seven months, with short selling far exceeding long selling. Net selling occurred in all regions, with relatively small net sell amounts in North America and Asian emerging markets. Both macro products and individual stocks were net sold. Among the 11 sectors globally, 8 sectors experienced net selling, with healthcare, finance, and industrial sectors leading the way.
Marshall concluded:
<blockquote>
&#34;Although stock valuations have been at historical highs for years, this is the first time in many years that we have seen significant sell-offs in these two positioning indicators.&#34;
</blockquote>
However, there are also views that unless significant macro factors trigger a large-scale sell-off, this round of selling may ultimately evolve into another large-scale short squeeze by hedge funds, which could instead drive the S&amp;P 500 index to new highs.

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Goldman Sachs analyst John Marshall pointed out that the hawkish shift of the Federal Reserve on December 18 led to a sharp decline in financing spreads, and the sell-off through futures channels is still ongoing this week. This is similar to the situation in December 2021, indicating that U.S. stocks may face downside risks

- Recent trends in the U.S. stock market show record highs, but signs of abnormality have emerged, with retail investors buying while institutional investors, particularly hedge funds, are shorting.  
- Goldman Sachs' John Marshall indicates that the recent drop in financing spreads signals continued selling by institutional investors, which is a significant warning sign for the market.  
- The current situation mirrors December 2021, when concerns over monetary policy led to a sell-off, suggesting potential risks for the S&P 500 despite recent gains.

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