Key Takeaways
- • Goldman Sachs' Flow of Funds analysis by Gail Hafif, Brian Garrett and Lee Coppersmith sees the technical backdrop for US equities improving even as sentiment and conviction remain unusually weak.
- • Buybacks are reopening and October fund selling is close to running its course, with November and December seasonal flows expected to become more supportive.
- • Hedge fund net exposure remains very low, while CTA downside selling is described as considerably larger than the buying that an equivalent rally would trigger.
- • Implied volatility is already compressed ahead of earnings, the midterm elections and the Fed, leading the authors to argue the market may be underpricing the size of the next move rather than its direction.
- • Foreign demand and retail seasonality could add support after the midterms, though positioning remains uneven beneath a composed index.
Summary
US equities have spent much of the past month in an unusual state: the S&P has stayed close to its highs, yet hedge fund conviction has collapsed, technology has been aggressively sold, mutual fund flows have been weak and cash has flowed into money market funds. The index looks calm while the investors trading beneath it appear far more defensive.
A recent Flow of Funds report from Goldman Sachs, authored by Gail Hafif, Brian Garrett and Lee Coppersmith, argues that the technical backdrop is beginning to improve even though sentiment and conviction remain unusually weak. The authors point to reopening buybacks and to October fund selling that is nearing its end. They also expect the typical November and December flow pattern to become more supportive.
Positioning remains a key constraint. Hedge fund net exposure is still very low, and the report notes that CTA downside selling would be considerably larger than the buying triggered by an equivalent rally. Foreign demand and retail seasonality could add a further layer of support after the midterm elections, but positioning is uneven beneath the index level.
The central risk identified in the report concerns volatility pricing rather than direction. Implied volatility is already compressed ahead of earnings, the election and the Fed decision, and the authors suggest the market may be underpricing the magnitude of the next move. The piece's title frames this as tails being mispriced even as buyers return.
A recent Flow of Funds report from Goldman Sachs, authored by Gail Hafif, Brian Garrett and Lee Coppersmith, argues that the technical backdrop is beginning to improve even though sentiment and conviction remain unusually weak. The authors point to reopening buybacks and to October fund selling that is nearing its end. They also expect the typical November and December flow pattern to become more supportive.
Positioning remains a key constraint. Hedge fund net exposure is still very low, and the report notes that CTA downside selling would be considerably larger than the buying triggered by an equivalent rally. Foreign demand and retail seasonality could add a further layer of support after the midterm elections, but positioning is uneven beneath the index level.
The central risk identified in the report concerns volatility pricing rather than direction. Implied volatility is already compressed ahead of earnings, the election and the Fed decision, and the authors suggest the market may be underpricing the magnitude of the next move. The piece's title frames this as tails being mispriced even as buyers return.
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