Woofun AI reports that the U.S. stock market experienced a structural liquidation at the position level in July, despite index stability, as Goldman Sachs head of hedge fund business Tony Pasquariello noted that consensus positions were smashed after a parabolic rise. The S&P 500 held its ground with a volatility range of only 3.5% throughout July, less than 2% from its peak, while AI-driven momentum cooled significantly.

The divergence between index calm and underlying volatility was stark in July, where the S&P 500 showed an average daily volatility of less than 1%, yet Goldman Sachs' flagship momentum basket swung close to 10% daily. Counterintuitively, the equal-weighted S&P, low-volatility S&P, and the S&P 500 excluding AI all reached historical highs this week. On June 22, Goldman Sachs' TMT momentum basket had recorded a year-to-date increase of 145%, only to suffer its most severe drawdown followed by a single-day rebound of 17%.

Global strategy drawdowns mirrored this domestic turbulence, as Asian fundamental long-short funds, which achieved record performance in the first half of the year, faced the largest single-month drawdown in the past decade.

Notably, South Korea's KOSPI surged 18% overnight, highlighting the erratic nature of regional surges amidst broader deleveraging. This volatility underscores that the risk-reward profile is no longer cheap, and the upside elasticity of global stocks has weakened considerably.

The scale of deleveraging indicates a real cleanse rather than a minor adjustment, with global tech exposure experiencing its largest sell-off in over five years. Korean stock leveraged ETFs saw their asset management scale drop from a June peak of $53 billion to $15 billion. Per Woofun AI, the total exposure reduction observed by Goldman Sachs' prime brokerage represents the largest decline since the end of 2022, signaling a significant retreat from high-beta positions.

Position changes further confirm this shift, as fundamental long-short clients reduced their leverage exposure to momentum factors to the 28th percentile of the past year. This drop indicates that crowded trades have moved from universal participation to forced exits for a significant portion of market players. The impulse to chase gains has noticeably decreased, replaced by increased cash holdings and disciplined navigation in a market where liquidity for previously profitable trades has evaporated.

The AI narrative shifted from pure speculation to a focus on returns, as market skepticism intensified regarding whether massive capital expenditures by ultra-large cloud providers could generate sustainable profits. Meta did not demonstrate significant realized AI returns, whereas Microsoft provided clearer signals that capital expenditures are translating into revenue and scaling AI products. Amazon subsequently reported a re-acceleration in AWS growth and an expansion in cloud business profit margins, helping to narrow the credit spreads of ultra-large cloud provider bonds.

Fed communication added complexity, as traders felt little relief after the FOMC meeting and volatility at the long end of the U.S. Treasury curve spilled over into equities. The central bank entered a more restrained phase, forcing traders to judge policy direction with fewer clues. Long-duration stocks, including AI, tech, and growth stocks, remain sensitive to distant discount rates, meaning that pressure from the long end of the global bond market can undermine stability even if short-term rates appear calm.

Macro support remains robust, with nearly $1 trillion in AI capital expenditures continuing to flow through the system, underpinning the S&P 500 despite underlying deleveraging. Economic performance is good, earnings growth is strong, and capital flows are expected to turn more positive. These fundamentals provide enough cushion to keep the index stable, even as the risk-reward ratio sits at a mid-range and global upside elasticity thins.

Nasdaq metrics reflect this tougher path, as the Nasdaq 100 is down 8% from its June peak but still up 12% year-to-date. Over the past nine months, the index has seen six months of decline, yet point-to-point it remains up 9%, with its price-to-earnings ratio falling back to the lower end of recent ranges. These figures convey that while the trend is not bad, the process is difficult, and valuations are resetting amid heightened uncertainty.

The conclusion is that the bull market persists, but the path ahead is defined by complexity and reduced liquidity in July. Summer conditions are not conducive to risk transfer, and crowded, illiquid positions will amplify volatility. Investors must prioritize increasing liquidity and reducing complexity, as the market no longer rewards crowded trades or forgives excessive leverage.