Goldman Sachs warns: Behind the big dump of US stocks lies a hidden fear of "extreme hedging".

On November 21, John Flood, a partner at Goldman Sachs, pointed out that the dramatic reversal of the U.S. stock market on Thursday highlighted that Nvidia's outstanding performance did not provide traders with the “risk-off” signal they had hoped for, but instead prompted them to urgently build defenses to avoid further losses. The U.S. stock market opened strong on Thursday but quickly evaporated. The S&P 500 index surged 1.9% in the first hour of trading but turned to decline just before 1 PM local time—creating the largest intraday fluctuation since the market turmoil in April, with over $2 trillion in market capitalization evaporated from its peak on that day, and for the first time in months closed below the 100-day moving average. The fear index VIX jumped above 26. This sharp reversal occurred against the backdrop of Nvidia's historic earnings report, leaving traders frantically searching for explanations. Various theories emerged: from the mixed September non-farm payroll report raising questions about the Fed's ability to cut rates, to concerns over excessive valuations, and the potential technical dynamics driving fast-money funds to continue dumping. “The market is currently filled with old scars,” Flood wrote in a report to clients, “the market is extremely focused on hedging 'crowded risks', and investors have entered a pure profit and loss protection mode.” Goldman Sachs' trading division observed a surge in shorting activities in the macro product space, covering trading platform ETFs, customized baskets, and futures types. Flood noted that since 1957, there have been eight instances (including Thursday) where the S&P 500 opened up more than 1% but closed down. The positive side is that the market typically performs well after such events, with average gains of at least 2.3% the next day and week, and an average increase of 4.7% over the following month. “These reversal events will prompt investors to reassess their risk exposure,” Flood summarized. (Jin10)