Market volatility is at YTD lows and liquidity is running rampant causing quant equity strategies to give back a portion of their YTD returns.

There has been a repetitive pattern in US equity markets over the past weeks; equity index futures trade flat to slightly up or down by a few basis points overnight, have a bit of price swings around the open, then settle with a modest positive day. In fact, there were only 1-2 "big" down days since July 1st. These market conditions have served long-only and long biased strategies well and resulted in extremely low market volatility.

The momentum factor has lifted over the past two years and its relentless trek higher is exemplified in the equity markets with winning stocks continue to trek higher with little consideration for fundamentals. 

Non-professional individual investors have often been perceived as less sophisticated than career financial professionals. Typically, the trading behaviors of these individual investors act as contrarian indicators, as their decisions are often influenced by less concrete fundamental factors.

The relentless melt up for risk assets continues with today's monthly equity options expiration serving as a technical gravitational pull for equity prices. On the macro side rates and FX markets were roiled by Powell replacement talk and commodities have caught a bid.

If the US consumer credit downtrend were to continue, some overvalued areas of the stock market linked to US consumer spending could be vulnerable to a pullback.

The market is sending mixed signals: a "risk-on" frenzy is driving expensive U.S. stocks, while professional investors are looking for value in Europe and betting on a weaker U.S. dollar.

Equity Long/Short strategies are underperforming the MSCI World index. The firm attributes this to persistent buying of overvalued stocks by US retail investors. The note also points to geopolitical risks, particularly crude oil volatility, and high hedge fund exposures as potential catalysts for a market downturn.

This week has featured a cooling of short squeeze pressures in the US and a spike in oil prices after Israel’s strikes on Iran.

Market participants will need to carefully navigate the shifting political and economic landscape, remaining agile and vigilant in their approach to capitalize on emerging opportunities and mitigate potential risks.