The end of the September in the stock market was a time of volatility, accelerated hedging and economic unease. It did not, however, spur an extreme reordering in trader sentiment, and to some of Wall Street’s old guard that’s worrisome.

While the S&P 500 posted its worst monthly performance since March 2020, there was no sign of the kind of cathartic surrender that contrarians look for in trying to call bottoms. Amid another early-week sell-off, hedge funds tracked by Goldman Sachs were only “modest” sellers. On Tuesday, when the benchmark suffered its biggest drop in four months, outflows from equity exchange-traded funds trickled to only a fraction of what had been seen the week before. 

At the same time, the hand-over-fist buying sprees that marked exits from past dips were also not in evidence. Retail traders backed away from their favorite speculative instrument. The S&P 500 approached 4,385 twice on Thursday before turning lower. The failure came one day after the level — which acted as ceiling in July and then served as support in August — thwarted the index’s four breakout attempts.  

“Until we see a washout or impulsive buying, a move to the 200 DMA on the S&P 500 can’t be ruled out,” said John Kolovos, chief technical strategist at Macro Risk Advisors. The index’s 200-day moving average sat near 4,135, a 4% decline from its last close. 

Stocks have tumbled as surging bond yields prompted investors to flee richly valued technology shares. Adding to the list of worries are concern about the government debt ceiling, rising political static around the Federal Reserve and supply chain disruptions. 

But panic was absent during the worst day of the carnage. On Tuesday, when the S&P 500 tumbled 2%, short sales from hedge funds were flat, as opposed to Sept. 20, when a smaller decline triggered a 5.5% jump in bearish positions, client data compiled by Goldman show. And exchange-traded fund outflows that day reached $1.7 billion, trailing the $12 billion withdrawals seen from Sept. 20, according to Bloomberg data.  

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Underpinning Tuesday’s sell-off were systematic traders who allocate assets based on volatility, according to Nomura Securities strategist Charlie McElligott. He estimated that volatility control funds and targeted risk strategies likely slashed equity holdings by $35 billion on that day alone. 

Broadly, fear has yet to reach levels that flag a buying opportunity. Nicholas Colas, co-founder of DataTrek Research, says one gauge he monitors is the Cboe Volatility Index, or VIX. The gauge peaked at 25.7 this month, short of the reading of 36 that typically signals what he calls a “tradable low.”

“We’re waiting for better levels before we get tactically bullish again,” Colas said. “We recommend long-term investors steel themselves for a difficult few weeks to come.” 

The usual dip buyers were not enthusiastic, either. Retail investors, one of the bull market’s biggest allies, has curbed their buying of bullish options while raising wagers against stocks. 

In fact, one trader just put out a massive hedging position via options to protect a portfolio of stocks in the event that the S&P 500’s losses snowball toward 20% during the fourth quarter.

To Matt Maley, chief market strategist for Miller Tabak + Co., the market is likely to follow the pattern from a year ago, when the jump in Treasury yields sent the S&P 500 toward a 10% correction. And with the Fed turning more hawkish on monetary policy, investors had better get ready for bigger turmoil, he said.

“We believe the correction will likely be a deeper one,” Maley said. “This year, the Fed is on the cusp of tapering back on their massive QE program and starting to talk about raising rates sooner than the market has been pricing in. Last year at this time, the QE program was running at full tilt.”