Goldman Sachs: U.S. macro product short positions reach a three-year high

Investing.com - The short positions in U.S. macro products have risen to their highest level in over three years, increasing the risk of a significant market rally as investors may be forced to close their bearish positions.

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Goldman Sachs data shows that short exposure in U.S. macro products (including indices and ETF positions) has surged sharply in recent weeks. As a percentage of the firm’s Prime Book total market value, short positions are at their highest since September 2022, ranking in the 93rd percentile over the past five years.

The accumulation of bearish positions makes the market prone to sudden volatility when sentiment shifts. Goldman Sachs traders, including Ariana Contessa, say that as positions become increasingly crowded, the current environment could amplify volatility.

Contessa wrote, “The market has already proven that, with traders currently short gamma, it has the capacity to swing violently in both directions.”

A short gamma situation means market makers may need to chase price movements, which can accelerate both upward and downward trends. In the current environment, Goldman Sachs believes that if negative positions start to unwind, the greater risk may be on the upside.

Contessa added, “However, the tail risk at the index level (short squeeze) is now prepared to reach extreme levels.”

Some early signs of this dynamic may already be emerging. Goldman Sachs points out that recent market reactions to more positive news in the oil sector and developments related to the Iran conflict have helped trigger buying pressure.

Hedge fund positions are also contributing to this scenario. According to Goldman Sachs, hedge fund leverage is approaching its highest levels in history, mainly driven by continued shorting and hedging trades through macro products like index futures and ETFs.

Contessa stated, “Hedge fund leverage is essentially at record highs, driven by persistent shorting through macro products (hedging trades).”