U.S. stocks are experiencing a rare internal rift.

U.S. Treasury yields soar, market breadth continues to deteriorate, and credit spreads widen, yet the S&P 500 index (. SPX.US) remains unmoved. Both bulls and bears are in a stalemate, and market sentiment is growing increasingly anxious.

On Wednesday, the head of Goldman Sachs' single delta trading desk, Rich Privorotsky, stated bluntly that the pace of rising U.S. Treasury bond interest rates "has become severe enough to ignore," with the actual monthly increase in rates being one of the worst since 2013. He warned that the surge in interest rate volatility is compressing Wall Street's ability to intermediate risks, and the pressure on the stock market is far more severe than what the indices appear to indicate.

At the same time, the pressure of end-of-quarter rebalancing is approaching – Goldman Sachs estimates that pension funds will sell nearly a record $33 billion in stocks by the end of this month, and the CTA systematic strategy will also net sell more than $5.3 billion in Russell 2000 futures over the coming week. The combined selling pressure makes the market's direction even more uncertain.

BTIG Strategist Jonathan Krinsky stated that his conversations with clients have been more or less the same in the past few weeks, but the frequency and level of anxiety have been increasing daily. There is only one core issue: the divergence between market breadth and interest rate trends, as well as those of the S&P 500, is no longer sustainable. However, no one can be sure in what manner this divergence will converge.

Behind the strong index, there are numerous internal flaws.

The S&P 500 index has remained virtually stagnant over the past month, but beneath this apparent calmness, structural damage is accelerating.

Krinsky pointed out that over the past month, the S&P 500 index has remained relatively flat overall, but the median stocks have fallen by 4.5%. The stability of the index relies entirely on a roughly 10% increase in the semiconductor sector to offset this decline. The Nasdaq 100 index (. NDX.US) has also seen almost no gain since mid-August; however, only 10 stocks within it have appreciated by more than 10%, while as many as 23 stocks have declined by over 10%. The strategy of "buying on breaks and chasing gains" is no longer effective, with more stocks experiencing larger and more sustained declines.

The trend of mid-cap stocks is particularly concerning. Mid-cap stocks have quietly fallen below the 200-day moving average, with a cumulative decline of over 8% from recent highs. At the same time, the number of stocks on the New York Stock Exchange that have reached new lows has exceeded the number of stocks that have reached new highs for 10 consecutive trading days. This signal often indicates broader market pressure in history.

Goldman Sachs' Privorotsky also confirms this judgment: 'The pain beneath the index is clearly visible – the pressure endured by small-cap stocks, financial stocks, and other sectors sensitive to interest rates far exceeds the apparent calm exhibited by technology leaders.'

Goldman Sachs: The rate hike speed has crossed the critical line

In the current market debates, Goldman Sachs' judgment is particularly crucial. Privorotsky clearly states that the stock market has "impressively maintained its resilience" so far, but the rising speed of real interest rates has triggered an alarm.

Goldman Sachs' analysis framework shows that when interest rates rise by more than two standard deviations, the stock market usually reacts. The key is not the absolute level of interest rates, but rather the speed of the increase. Currently, this threshold has been exceeded. The monthly increase in real interest rates has fallen into one of the worst ranges since 2013.

Privorotsky also observed a "peculiar asymmetry in price behavior": when oil prices and interest rates improve simultaneously, there is almost no reaction to interest rate risks; however, once oil prices rise, interest rates immediately come under pressure. He believes that inflation expectations for 5 and 10 years are still following fluctuations in energy prices, but a considerable portion of the current interest rate shocks comes from an increase in real interest rates, rather than inflation expectations.

His conclusion was concise and powerful: “I can be extremely optimistic about artificial intelligence and its rate of development, but at present, unless the issues of energy and interest rates are resolved, such optimism is almost meaningless.” The logical chain is clear: suppressing oil prices helps to lower interest rates, and stable interest rates can create more room for a broader recovery in the stock market.

End-of-quarter rebalancing and CTA stress testing: dual selling pressures looming

In addition to fundamental pressures, technical selling pressure is being released intensively at the end of the quarter.

Goldman Sachs estimates that pension funds need to sell approximately $33 billion in stocks at the end of each month and quarter (about $11 billion at the end of the month and about $22 billion at the end of the quarter), and buy an equal amount of bonds. This scale ranks at the 97th percentile among all sales and purchases estimates over the past three years, and if traced back to January 2000, it ranks at the 98th percentile, close to historical extremes.

At the same time, Goldman Sachs' CTA model shows that in a scenario where prices remain flat, systematic strategy managers are expected to net sell approximately $5.3 billion worth of Russell 2000 futures over the next week, which is one of the largest sales estimates in the past six years.

Privorotsky is "tactically tempted" by this, believing that the factors at the end of the quarter and month should provide support for duration assets. However, he also acknowledges that the core contradiction in the current situation lies in: which will give in first before the end of the quarter, the bond buying side for pension rebalancing or CTA's stock index selling side?

Stalemate between bulls and bears: Who will blink first?

In the view of Krinsky, the current market is essentially a standoff between bulls and bears, and neither side has yet been proven to be right.

The logic of the bulls is that the market breadth is being thoroughly cleaned, and a significant upward correction could occur at any time; interest rates are also expected to fall rapidly at some point. On the other hand, the bears argue that as breadth continues to deteriorate, yields continue to rise, and credit spreads widen, it is impossible for the S&P 500 to remain unscathed in the long term.

Krinsky personally tends to hold a bearish stance, but he added a tactical exception – the utilities sector (XLU). He pointed out that after RSI falls below 35, the probability of XLU rising within the next 5 trading days is 100%, with an average increase of 2.7%, and the current risk-reward ratio is attractive.

His final conclusion was: This deviation will not converge gently in the way that bulls expect. "We believe that this will not end until those last resisters finally yield and break down."

Cracks in pricing that the credit market has failed to account for due to stock volatility have begun to appear – high-yield credit default swaps ( HY CDX ) have risen to their highest level since April, when VIX was at 19.23, far higher than the current 16.35. This divergence may well be the clearest warning of what lies ahead.

Edit / joryn

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