Yesterday we reported that according to Goldman Sachs, creator of the Hedge Fund VIP Basket of 50 most popular stocks among the hedge fund community, the recent underperformance of this basket…

… coupled with the disappointing response to stocks beating in Q1 earnings season, was a growing threat to market stability as it portended that a liquidation “cliff” event could be just one sharp drop in the S&P away.

This is how Goldman phrased it:

Investors should be attentive to the positioning dynamics currently driving stock performance. If the S&P 500 takes another turn lower, popular positions will likely underperform, with mutual fund and retail favorites particularly vulnerable, while hedge fund favorites look poised to outperform if the market continues to rally.

This growing concern about hedge fund skittishness emerged as, somewhat paradoxically, retail investors turned increasingly more bullish after a period of broader liquidation at the start of earnings season; in other words as hedge funds turned more bearish, retail investors become increasingly bullish. Said otherwise: the smart money has been increasingly selling to the dumb money.

Needless to say, this is a very precarious disequilibrium, as the subtlest hint of a trend reversal within the retail community – ostensibly a confirmation that the smart money has been dumping – could unleash a retail liquidation wave. Which is a problem because as the next chart from Goldman shows, retail investors have been a growing influence on markets, with retail trading soaring to record levels at the start of 2018, and prompting the market “blow off top” that prompted many concerns among the institutional community.

Indeed, as Goldman adds, household equity allocations entering 2018 were at the highest levels since 2001:

Equities in total accounted for 42% of household financial assets at the start of 2018. However, increased allocations to global equities have kept domestic equity allocations from exceeding the 2007 level of 32%.