As retail investor greed reaches elevated levels, "smart money" is quietly retreating.

Macro strategist Simon White recently published an analytical piece exploring a concerning phenomenon in current equity markets. As a seasoned macro analysis expert, White tracked the movements of "smart money" to reveal the risks accumulating beneath the seemingly celebratory surface of the US stock market.

The analysis indicates that despite US stocks appearing to continue their upward trajectory, hedge fund groups represented by macro funds and quantitative funds have already shown distinctly cold attitudes toward equities. White believes this shift typically foreshadows declining future market returns.

Meanwhile, overall market sentiment has begun shifting from previous "fear" toward "greed," with retail investor speculative enthusiasm running high. White warns that current market conditions are displaying a type of fragility. As he states, "It is precisely because greed is seeping into this rally that we should pay particular attention to the wariness of 'fast money.'" Such greed is rarely sustainable, with historical data showing that once greedy sentiment dominates, stock markets typically perform poorly in the subsequent one to three months.

**Divergence Between "Smart Money" and Retail Investors**

White begins by highlighting that 2025 has been a difficult year for hedge funds, with their overall returns lagging the S&P 500 by approximately five percentage points. Macro funds and Commodity Trading Advisor (CTA) funds have been among the worst-performing groups.

Data shows that with few exceptions, these funds failed to profit from the market's rebound from lows. While they eventually established long positions, they quickly lost confidence in the upward trend in July, with their sensitivity to S&P 500 returns dropping to near-zero levels.

So does this mean they've detected something? White believes the answer is likely affirmative. His data demonstrates that when macro funds and CTA funds - this type of "smart money" - short stocks while retail investors go long (as is currently happening), it historically predicts weakening stock market performance over the next 1-3 months.

Specifically, under these circumstances, the S&P 500's average returns for the next one, two, and three months are -0.1%, 0.2%, and 1.6% respectively, all significantly below historical average returns of 0.7%, 1.4%, and 2.3% for the same periods.

**Greed Replaces Fear: A Dangerous Signal**

More fundamentally, what's driving these funds to remain vigilant is precisely that greed is seeping into this rally. White emphasizes that it's because of this emerging greedy sentiment that we should pay special attention to "fast money's" cautious stance. This emotional shift can be observed across multiple dimensions:

**Speculative Stock Surge:** Goldman Sachs' "most shorted stocks basket" has recently soared at record pace. Meanwhile, the bank's "speculative trading indicator" tracking meme stocks, loss-making companies, and high price-to-sales ratio companies has reached its highest level in over three years.

**Options Market Signals:** Market sentiment has shifted from "fear" dominance at the rally's beginning (when investors used put options to hedge downside risks) to recent "greed" dominance. White defines the "greed mechanism" as: out-of-the-money call option implied volatility outperforming out-of-the-money put options, with the VIX panic index declining. History proves that "greed rarely ends well, and once it dominates, stock markets typically perform poorly over the next one to three months."

**Growing Complacency:** White warns: "Unlike greed, complacency isn't one of the seven deadly sins, but in markets it should be." Collective overconfidence is the source of many market declines. An obvious sign is the decline in short-term implied volatility relative to long-term implied volatility. This can be measured by the VIX/VXV ratio (VIX measures 30-day forward volatility, VXV measures 90-day forward volatility). When this ratio rises rapidly, it means markets believe "risk lies in the future, but doesn't matter today." When this mentality reaches extremes, it's often associated with short-term stock market reversals.

More concerning is that this calm volatility isn't limited to stock markets. White notes that cross-asset volatility covering stocks, bonds, credit, foreign exchange, and oil is declining comprehensively. This suggests markets don't appear to bear any "scars" from some truly unprecedented events that occurred in recent months, such as trade wars.

**Potential Risks Under Low Correlation**

The analysis also delves into a technical but crucial concept: stock implied correlation. This indicator measures the degree of synchronization among individual stock movements within the S&P 500. When correlation is low, it means stocks are moving more independently rather than rising and falling together.

Why is low correlation a potential risk? White explains that during calm market periods, low correlation artificially suppresses the VIX index. However, once markets begin declining, stocks increasingly tend to move in synchronization (in extreme cases, when investors sell everything, correlation approaches 1). At that point, correlation rapidly rebounds, driving VIX spikes, which in turn triggers further selling, creating a vicious cycle. Therefore, current low correlation acts like a potential "decline accelerator."

**Contrarian Perspective**

Interestingly, White also provides a contrarian observation perspective. According to Nomura data, CTA funds appear to have just abandoned short positions, with their long positions reaching their highest levels in at least three years. White acknowledges that the indicators he uses to analyze fund movements have certain lags, and macro and quantitative funds may have also re-established long positions in the past week or two.

But this trend-chasing behavior itself carries enormous risk. White concludes with a clear warning: given these funds' previous poor returns, if they're now scrambling to catch up with this "stubborn" rally, they better hope they're right this time.