Goldman Sachs Warns of 73.7% CTA Sell-Off Risk in September

Goldman Sachs has cautioned that the Commodity Trading Advisors (CTA) have reached a 100% fully invested position, signaling that the historically weak month of September for U.S. stocks may lack supportive capital inflows. This situation is exacerbated by the potential for up to 736.9 billion dollars in sell-offs if the market declines, posing a significant downside risk. The firm's liquidity analysis team highlighted that CTAs, which have been a key driver of market gains in recent months, have exhausted their buying power. Their stock positions in the U.S. have dropped from 276.6 billion dollars in July to 125.6 billion dollars in August, with projections indicating a further decline to just 29.6 billion dollars for the entire month of September. This reduction in buying power could trigger forced liquidations by CTAs if the market enters a downward spiral, adding to the market's volatility.

Despite these challenges, Goldman Sachs noted that institutional investors' overall positions remain relatively moderate. This, combined with traders holding record high long positions and the low correlation between individual stocks and the broader market, could act as a buffer. These factors are expected to keep index-level volatility in check and limit the depth of any potential declines. The firm emphasized that while the market is not without support, the current environment suggests that September could be particularly challenging. Historical data shows that September is the worst-performing month for the S&P 500 index, with an average return of -1.17%. The second half of September is even more problematic, with an average return of -1.38%. This seasonal weakness, coupled with the potential for forced liquidations by CTAs, creates a precarious situation for investors.

Institutional investors have been net sellers of U.S. stocks for the past two months and are approaching September with caution. Despite recent market rebounds, Goldman Sachs' sentiment indicators remain negative, suggesting that overall positions are relatively balanced. This cautious stance is reflected in the activities of hedge funds, which have seen a significant increase in net leverage for directional strategies over the past few months but have remained relatively stable in August. The net leverage ratio for U.S. directional strategies is at the 32nd percentile over a five-year period, indicating a lack of strong directional bets. This suggests that any market downturns are likely to be moderate and short-lived, provided there are no major fundamental shocks.

Market participants are exhibiting notable divergence in their strategies. Data from Goldman Sachs' prime brokerage business shows that hedge funds have aggressively rotated into emerging market stocks, particularly in China, over the past month. This shift is driven by significant net buying flows, which are three standard deviations above the ten-year average. The funds are primarily focused on Chinese technology ETFs and large-cap stocks like Alibaba. This indicates that global capital is actively reallocating to other regions as U.S. stocks face challenges. Meanwhile, retail investors, while increasingly active in individual stock trading, continue to favor passive funds like ETFs. This trend has exacerbated the divide between active and passive funds, with ETFs remaining heavily concentrated in large-cap tech stocks. The flow of funds into U.S. money market funds has reached 409 billion dollars since 2019, while flows into U.S. bond funds and stock funds are 246 billion dollars and 24.7 billion dollars, respectively. This highlights the prevalence of a "cash is king" mentality despite the rise in the S&P 500 index.

Despite the challenging macroeconomic backdrop, the market's internal structure provides some stabilizing factors. Traders are in a record high gamma state, with option positions increasing by 109 billion dollars over the past ten days, the highest on record. This state means traders will act as market stabilizers, buying during downturns and selling during upturns, thereby limiting index movements. Additionally, market correlation is at a 30-year low, indicating that individual stocks are moving independently, and the market is no longer characterized by uniform movements. This aligns with institutional investors' active stock-picking strategies and retail investors' continued preference for passive funds. Furthermore, volatility itself is at an "extremely cheap" level, with the one-month implied volatility of the S&P 500 index near its lowest point in a year. This makes options-based hedging highly cost-effective, given the dense schedule of macroeconomic events in September.