Liberation Day - Will the S&P 500 Fall?

This week, the S&P 500 continued its decline, while bonds gained and gold reached a record high — reflecting growing concerns over economic weakness and rising inflation risks amid escalating trade tensions. 

Liberation Day:

On April 2nd, President Trump is expected to implement his proposed tariff plan. Markets have already begun pricing in the risk of a trade war — but if tensions ease, a relief rally in both equities and bonds could follow. In this article, we examine recent shifts in trader positioning within the S&P 500 and assess how different investor groups are preparing for this key event.

The chart above displays the yearly rolling Z-score for various trader groups. Notably, asset managers have been steadily reducing their exposure since Trump’s election in November. Hedge funds initially mirrored this trend but began increasing their positions in February. Meanwhile, retail investors remain significantly overweight, with their positioning sitting more than one standard deviation above the historical average.

Both hedge funds and retail investors remain optimistic, with their net positioning over the last twelve months reaching the 87th percentile. In contrast, asset managers have taken the opposite stance, sitting at just the 19th percentile.

In anticipation of this week’s events, both retail investors and hedge funds reduced their positions, while asset managers increased theirs — a move that aims to recalibrate their respective extreme positioning.

VIX positioning reveals that both retail investors and asset managers remain overweight, with their net exposure in the 85th percentile. In contrast, hedge funds are positioned more neutrally at the 46th percentile. Notably, hedge funds were the only group to increase their exposure this week, while both retail investors and asset managers reduced theirs.

Conclusion:

Hedge funds appear to be positioning for a “sell the rumor, buy the news” scenario, anticipating that the implementation of tariffs next week may be less severe than expected and that a full-scale trade war will be avoided. In contrast, retail investors are using VIX contracts to hedge their overweight exposure to the S&P 500. Asset managers, meanwhile, hold a significant long position in VIX while remaining underweight equities — effectively positioning for a spike in volatility and a potential market downturn driven by escalating trade tensions.