As investors, we are constantly navigating the ups and downs of the stock market. Recently, UBS Rebecca Cheong has highlighted potential short-term downside risks in US equities, citing historical data and current market conditions. In this blog post, we will delve into the analysis provided by Cheong and explore the potential implications for investors.

Cheong’s analysis is based on the comparison of historical excess sell flow and VIX cross-asset rank. According to her, there have been significant excess sell flows in recent times, particularly from China tariffs and regional bank turmoil. However, despite these headwinds, the SPX has only declined by 1.9% below its all-time high on October 8th, which is significantly less than the average 12.3% decline seen in similar periods of heavy selling and leverage.

Cheong attributes this discrepancy to the potential for a Q4 rally seasonality, which could trigger “buy-the-dip” sentiment earlier and limit current downside versus history. Additionally, she notes that the VIX Cross-Asset Rank is currently at 80%, which is below the typical over-hedged level of 95%. This suggests that there may be room for further volatility in other asset classes versus risk premiums.

While Cheong’s analysis highlights potential downside risks, it also acknowledges the high systematic rebalance risk currently present in the market. The Risk Control Exposure stands at 87%, or the 64th percentile over the past five years. This suggests that investors should be cautious and prepared for potential shocks in the market.

Cheong’s analysis provides valuable insights into the current state of the US equity market. While there may be potential downside risks, the historical data and current market conditions suggest that investors may want to consider a more balanced approach to risk management. By staying informed and prepared for potential shocks, investors can navigate the ups and downs of the stock market with confidence.