As Rebecca Cheong of UBS points out, the US equity market’s internals are deteriorating, indicating a potential pullback in late September or early October. Cheong notes several signals that suggest a weakening of market internals, including:

1. CTA exposure at a five-year high: The chart shows that CTA exposure has reached levels not seen since 2014, which could be a sign of complacency among investors.
2. SPX Dealer Gamma approaching complacent level: Dealer gamma is the amount of profit that dealers make from buying and selling stocks. When this metric approaches $30 billion, it can indicate that dealers are becoming too confident in the market’s upward trajectory.
3. Climbing Risk Control exposure: Cheong notes that risk control exposure has been climbing steadily over the past few weeks, which could be a sign of increased risk-taking among investors. By month end, this exposure could reach 100%.
4. Corporate blackout period heading into quarter-end: This time of year typically sees a surge in corporate activity, such as earnings announcements and M&A deals. However, the lack of these events could indicate that companies are holding back due to uncertainty or caution.

Cheong’s analysis suggests that these signals may indicate a weakening of market internals, which could lead to a pullback in US equities. While it is impossible to predict with certainty when such a pullback will occur, Cheong’s insights offer valuable insight for investors looking to position themselves ahead of potential market movements.

The deterioration of market internals highlighted by Cheong could be a sign that the US equity market is due for a correction. By paying attention to these signals and staying informed about market trends, investors can make more informed decisions about their investments and potentially avoid losses during a potential pullback.