Goldman Warns: The Bottom Is Not Here Yet, Despite Retail Mania and the Short-Term Rebound

In the midst of the fastest and, according to many, the most brutal market crash since the COVID collapse, which sent Tesla down more than 50% from its historic peak just a few weeks ago and pushed Nasdaq into oversold territory (from which it has always recovered like clockwork)…

We and others have said that the market is on its way to a significant bounce. And of course, that’s exactly what’s starting to happen – the hardest-hit sector, the high beta momentum, which collapsed nearly 30% in less than a month (its largest drop in years), is beginning to slowly recover.

So, with the trade war tensions easing, a seemingly possible truce in Ukraine (at least according to Polymarket), and an American economy that is neither crashing nor slipping into stagflation (with stable employment and CPI data), is this the famed bottom? And are we finally starting the rise – real or temporary?

One thing is certain – it didn’t take long for retail investors to return to the market. As shown by the following breakdown of retail activity from Goldman’s trading team, individual investors are quickly heading back to their favorite stocks such as Nvidia, Tesla, Netflix, and Ford.

Hedge funds, which have suffered dramatic losses in recent weeks and are not rushing to return to the market, have certainly taken advantage of the rebound on Tuesday and today. According to Goldman Prime, on Tuesday, fundamental Long/Short managers reported a 0.7% increase with a +1% alpha – the best one-day result in almost three years. Among the key positive factors: crowding effect (concentrated trades that recovered after previous sell-offs), volatility, and asset selection. Including Wednesday, the overall hedge fund performance for the year so far is -1%, but with a positive alpha of +0.5%.

With hedge fund performance improving on Tuesday (and a positive trend again today), here are some details from JPMorgan’s latest market positioning team observations (the full analysis is available to professional subscribers).

Summary:

Hedge fund performance began to recover on Tuesday, as momentum and tightly concentrated trading strategies showed better results. HF positions suffered a sharp decline over the past month, nearing the worst levels seen in recent years in North America and EMEA (Europe, the Middle East, and Africa), suggesting that much of the sell-off may already be over. However, gross flows do not show such a definitive move (excluding one week of massive sell-offs in EMEA). Gross leverage remains high but is beginning to decrease, which creates risks:

• If the sell-offs continue, this could affect L/S funds that still hold significant long positions.
• If the market recovers sharply, quant strategies may be forced to reduce their risk exposures.

The best scenario would be a smooth market recovery and a reduction in volatility, which would allow better risk management.

From a net perspective, the net risk of CTA funds in U.S. stocks has returned close to October 2023 levels, though still above the 2022 bottom. Much of the net sell-offs are happening through futures. In North America, hedge funds were net sellers in January and February, but have recently been buying (Mag7, software companies, closing short positions in healthcare, utilities, consumer staples, while selling airlines, energy, banks, and med-tech companies). ETF and retail flows are mixed, with no clear signals of massive sell-offs.

In Europe, hedge funds saw weak alpha last week, coinciding with one of the largest 5-day drops in gross exposure (-2.6z). Long positions were sold in the industrial sector, UK exporters, financial companies, and healthcare, while short positions in the consumer sector were closed.

In Asia, hedge fund performance was more resilient, with no major sell-offs. CTA funds remain strongly net long in Hong Kong stocks (near historical highs), while hedge funds are shorting them. Japan continues to be net sold, in line with the 2024 trend.

The Bottom Hasn’t Been Reached Yet?

Not everyone is convinced that the market has already found its bottom. Lindsey Matchem from Goldman Sachs believes that the bottom is still not here and presents the following arguments:

1. DOGE and tariffs are still not reflected in the data
   • The latest NFP data was weak, but not catastrophic.
   • Wage growth has returned to more normal levels.
   • Labor force participation and hours worked remained weak but showed the direction of macroeconomic processes.
2. The bond market is not pricing in a recession
   • Expected rate cuts have increased, but not to levels that suggest a recession.
   • Historically, recessionary cuts are around -200 bps per year, whereas currently they are only -71 bps.
3. The price of protective hedges is still cheap
   • Despite increased demand for protection during sell-offs, it remains relatively inexpensive historically compared to other risk events.

In conclusion, while there are signs of stabilization, the market has not yet given a clear signal of a sustainable recovery.

Credit Spreads Are Still Tight

Widening credit spreads signal that the increasing costs of borrowing are beginning to affect the real economy. Keep a close eye on the CDX HY spreads, which have widened but still remain relatively tight historically compared to previous market declines.