The S&P 500 just hit a record closing high, but a strange atmosphere pervades Wall Street—not celebration, but vigilance. At Friday's close, the S&P 500 reached a new high, but 324 of its components closed lower, resulting in a net breadth reading of -148, the second-worst breadth performance ever recorded for a record high. In other words, the index hit a new high, but most stocks declined.

This sense of disconnect between rising indices and falling individual stocks reminds me of the rebound after the crash in March 2020—back then, only a few tech stocks carried the index upwards, only to be followed by a period of sharp volatility. And now, alarm bells are ringing within Goldman Sachs' trading desk.

Hedge funds' largest deleveraging in seven months

Goldman Sachs' commodity brokerage data shows that nominal deleveraging in US stocks last week reached a seven-month high, primarily driven by risk liquidation. The consumer discretionary and technology sectors saw the most aggressive deleveraging, marking the third-largest weekly deleveraging in nearly five years.

What does this mean? Simply put, hedge funds are collectively "reducing their positions to avoid risk." I witnessed a similar scenario in April 2020, when hedge funds suddenly and massively reduced leverage during the rebound following the impact of the pandemic, after which the market experienced a correction of about 10%.

In a weekend memo, Goldman Sachs trader Brian Garrett wrote that hedge funds' net exposure "remained relatively restrained throughout the year, within a range of plus or minus 53%," which he sees as prudent risk management in a market environment rife with "unknowns of the unknown." In simpler terms: even these savvy investors are buying insurance; shouldn't retail investors also consider whether they're being too optimistic?

$25 billion in passive selling is coming.

The second warning sign comes from pension fund rebalancing. Goldman Sachs estimates that pension fund rebalancing at the end of April will generate approximately $25 billion in selling demand for US stocks. How large is this figure? It ranks among the top 15 of all sell estimates since 2000. If quarterly maturity factors are excluded, this is even the largest single-month sell estimate in history.

Pension rebalancing is a "passive sell-off," unaffected by market sentiment; the amount sold will be whatever is available. This means that regardless of market movements next week, these $25 billion in sell orders will still be placed. I recall a similar rebalancing occurred in October 2022, when the S&P 500 fell by about 3% in the following two weeks.

The largest buyer is already "fully invested".

The third signal comes from trend-following strategies (CTAs). Since April, CTAs have been the most significant financial force driving the global stock market rally, accumulating approximately $53 billion in global stock purchases during the month, with net purchases of about $32 billion in the S&P 500 alone. However, data from Goldman Sachs' futures trading desk indicates that this buying momentum has ended.

In layman's terms, CTAs, these "buy high, sell low" machines, have bought enough. They are no longer net buyers; instead, they are slightly biased towards selling when the market is stable. This means the market has lost an important "automatic stabilizer." Once the market declines, CTA selling will further amplify the drop.

The performance of the semiconductor sector is reminiscent of 2000.

The fourth signal comes from the extreme movement of the semiconductor sector. The Philadelphia Semiconductor Index (SOX) has risen for 18 consecutive trading days, setting a record for the longest winning streak in history, and closed on Friday about 50% above its 200-day moving average. This is the most extreme deviation from the 200-day moving average since the peak of the bubble in 2000.

I recall a similar situation with the Nasdaq in March 2000—the index hit a new high, but the breadth of gains was extremely poor, with the semiconductor sector experiencing outrageous growth. What happened? Over the next two years, the Nasdaq plummeted by 78%. Of course, the fundamentals are completely different now; the demand for semiconductors driven by AI is real, but the principle that "what goes up must come down" remains unchanged.

Sentiment indicators have entered the "stretch zone".

The fifth signal comes from Goldman Sachs' US equity sentiment indicator: investor positioning has shown a "stretch" characteristic. Looking at the derivatives market, the S&P 500's gamma positioning is in an unusually high range, with market makers exhibiting an extremely net short gamma position regarding the direction of a breakout in the spot market. This means that once a directional breakout occurs, volatility will be significantly amplified.

Currently, almost no professional investors hold direct long positions, and the implied volatility of July call options is trading only around 12. Going long remains a "lonely trade"—an interesting statement that suggests even the smartest money in the market is not optimistic about short-term trends.

Is a pullback a buying opportunity?

Despite five warning signs pointing to a short-term pullback, Goldman Sachs still believes the S&P 500 will close significantly higher than current levels in 2026, and that any pullback should be viewed as a structural buying opportunity. Historical data shows that since the financial crisis, whenever the S&P 500 has retraced more than 10% to its previous high, the average returns over the following one week, one month, and three months have been 1.5%, 5.2%, and 8.6%, respectively.

My view is: cautious in the short term, optimistic in the long term. This week will be the busiest week of the year, with both the Federal Reserve and the Bank of Japan announcing their interest rate decisions. Approximately 44% of the market capitalization of S&P 500 companies will release their earnings reports this week, including tech giants such as Google, Microsoft, Amazon, Meta, and Apple. These events, combined with the five signals mentioned above, make short-term volatility inevitable.

But if you ask me, I would say: pullbacks are opportunities. However, don't rush in on the first day of decline; wait until the market has digested the risks. Investment decisions need to be based on your own circumstances; the market will always be uncertain.