American institutional investors' funds run out: The essence of the market plunge

The recent market exhibited an abnormal situation where stocks, cryptocurrencies, gold, silver, and even the US dollar all declined simultaneously. This dramatic downturn in American money markets suggests that it is not merely a temporary correction but indicates that the overall market liquidity structure has reached its limit. Behind the large-scale position unwinding by institutional investors lies a more serious cash shortage problem than expected.

Cash Ratio at Historic Lows

Analysis of global fund managers’ portfolio compositions reveals that the current cash position has fallen to a historic low of 3.2%. This figure clearly indicates that the cash held by fund managers is extremely insufficient to sustain a bullish market trend.

Furthermore, when looking at the total amount of investable funds in the US market relative to its market capitalization, it is also confirmed that this ratio has dropped to a historic low. Market participants are nearly fully invested, with little cash remaining to add to positions. This situation makes the entire market highly sensitive to even minor price fluctuations.

Market Fully Invested Facing Liquidity Crisis

Interestingly, the main buyers of ETFs have shifted to individual investors. While large institutional investors are reducing their holdings, individual investors are filling that role. However, such liquidity supply cannot last forever. When the overall cash ratio in the market reaches its limit, even small negative news can cause the market to rapidly switch from an upward momentum driven by additional funds to a passive selling mode.

In such a cash-strapped environment, any price movement beyond a certain risk budget can trigger margin calls or stop-loss levels. As a result, passive mechanisms—rather than subjective decisions by institutional investors—begin to operate, automatically reducing positions based on risk control models.

Activation of Passive Deleveraging

The most notable feature of this downturn is its mechanism. The information disclosure during earnings season has become the “last straw” that broke the camel’s back. It is not that corporate performance was particularly poor; rather, the problem lies in the market’s lack of tolerance for any further deterioration.

Earnings season fundamentally involves two elements: market expectations and price movements. Currently, expectations are set so optimistically that even if corporate results are not terrible, they are judged as “below expectations.” Additionally, with positions already at full capacity, even minor adverse fluctuations can trigger warnings in risk control models, prompting institutions to sell cautiously.

This sharp market decline is not driven by clear sell signals from institutional investors but is an automatic shift from “adding to positions” to “protecting oneself” caused by decreased liquidity efficiency at the margin. In the protection mode, institutions do not simply exit weakly but rapidly reduce risk exposure. This is a result of the combined effects of position structure and risk control mechanisms.

Assets Most Easy to Sell Lead the Decline

An intriguing phenomenon is that assets being sold in this phase are not necessarily the “worst assets” but rather the “most liquid and easiest to sell.” Highly liquid stocks, ETFs, gold, and some mainstream cryptocurrencies are prioritized for liquidation. Since gold and silver had already experienced significant gains, risk control triggers responded sensitively, making them the first to be disposed of at this stage.

Implications for Future Market Trends

Understanding the core of this market plunge highlights key points for predicting future market movements. If ETF fund inflows turn negative, redemption requests continue, and volatility keeps rising, this decline may not be a short-term event but could extend over a longer period.

Conversely, if ETF inflows persist (with retail investors continuing to buy), and the current decline merely reflects a slight leverage unwind, then the price drops caused by this phase could present a buying opportunity for institutions. The liquidity trend of US money will become the most critical indicator for future market direction.

In conclusion, it is not accurate to say that the market fell because US institutional investors ran out of money. More precisely, the cash ratio among institutions has fallen to an extremely low level, and the entire market has become fully invested, creating a structure where any fluctuation triggers heightened sensitivity. As a result, even minor volatility during earnings season can cause the market to swiftly switch from an upward momentum driven by increased capital to a passive selling mode. This change in liquidity structure will continue to have profound impacts on the overall US money market.