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Goldman Sachs Warning: "Extreme Hedging" Panic Lurking Behind US Stock Market Plunge
BlockBeats News, November 21st, Goldman Sachs partner John Flood pointed out that the dramatic reversal of the US stock market on Thursday highlighted that Nvidia's outstanding performance did not bring the anticipated "risk-off" signal to traders, but instead prompted them to urgently build defenses to avoid further losses.
The US stock market opened strong on Thursday morning but quickly turned sour. The S&P 500 index surged 1.9% in the first hour of trading, only to reverse into a decline before 1 p.m. local time—a record intraday swing since the market turmoil in April, evaporating over $2 trillion in market value from the day's peak and closing below the 100-day moving average for the first time in months. The VIX fear index jumped above 26.
This violent reversal occurred against the backdrop of Nvidia delivering a historic financial report, driving traders crazy seeking explanations. Various theories emerged: from the mixed signals of the September nonfarm payroll report raising doubts about the Fed's rate-cutting ability, to concerns about overvaluation, to technical developments that may continue to trigger selloffs by momentum funds.
"The market is now full of old scars," 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, covering trading platform funds, custom baskets, and futures. Flood pointed out that there have been eight cases since 1957 (including Thursday) where the S&P 500 surged over 1% at the open but closed down. The positive side is that after such events, the market has historically shown a good performance, with gains of at least 2.3% the next day and week on average, 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)
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