Goldman Sachs traders: US stocks will face continued selling pressure this week

After a strong rebound in the U.S. stock market last Friday, selling pressure has not been alleviated. Goldman Sachs' trading team pointed out that trend-following funds may continue to sell this week, combined with weakening liquidity and a negative gamma pattern in the options market, the U.S. stock market may continue to fluctuate and amplify volatility.

According to Bloomberg, Goldman Sachs' trading desk noted that the S&P 500 index has triggered the short-term threshold for trend-following strategy (CTA) reductions, and this type of system strategy, which is not based on fundamentals but rather on momentum trading, is expected to maintain a net selling position in the coming week, regardless of market direction.

Goldman Sachs' calculations show that if the market weakens again, approximately $33 billion in selling could be triggered this week; if the stock market rises, approximately $8.7 billion in selling could still be triggered. For the market, this means that even if the index rebounds, it may be more susceptible to "upward resistance" caused by capital outflows.

Goldman Sachs' trading desk also emphasized that the order book liquidity has significantly thinned, and the positions of options traders have shifted from positive gamma to negative gamma, which may lead to more severe intraday volatility. At the same time, other strategy funds (such as risk parity strategies and volatility control strategies) remain highly positioned, combined with weakening retail inflows, increasing the downside risk for the market.

CTA Selling: "Trend Reduction" May Become the Main Line This Week

Goldman Sachs stated that the S&P 500 has crossed the short-term trigger point for CTA, prompting it to sell stocks. The bank expects that CTAs will continue to net sell in the coming week and provides estimates of capital flows under different market scenarios:

1. If the market consolidates, CTAs are expected to sell approximately $15.4 billion in U.S. stocks this week.

2. If the stock market rises, approximately $8.7 billion may still be sold.

3. If it declines again, approximately $33 billion in selling could be triggered.

More attention is drawn to the "threshold effect." Goldman Sachs data shows that if the S&P 500 falls below 6707 points, it could potentially release an additional $80 billion in systemic selling over the next month, providing a potential amplifier for market downturns.

Thinning Liquidity and Negative Gamma Return, Amplifying Bidirectional Volatility

Beyond the pressure of capital flow, Goldman Sachs' trading team believes that microstructural factors will make the market more "bumpy." The top-of-book liquidity of the S&P 500 has sharply decreased from an average of approximately $13.7 million this year to about $4.1 million.

The Goldman Sachs trading desk team (including Gail Hafif and Lee Coppersmith) wrote in a report sent to clients on Friday that risks cannot be quickly transferred, leading to increased intraday volatility and delaying the stabilization of overall price behavior.

The position structure in the options market has also changed. According to Goldman Sachs, traders were previously in a positive gamma area that helped suppress the index from breaking above 7000 points; it is estimated that it has now turned into negative gamma.

In a thin liquidity environment, this structure makes it easier for traders to buy when prices rise and sell when they fall to hedge positions, thereby amplifying price fluctuations.

Other Systematic Funds Still Have "Room to Reduce Positions," But It Depends on the Persistence of Volatility

Apart from CTAs, Goldman Sachs pointed out that other systematic strategies also have significant room for risk reduction: looking back over the past year, the current position of risk parity strategies is at the 81st percentile (the current position is higher than 81% of the time over the past year), while the position of volatility control strategies is at the 71st percentile.

Unlike CTAs, these two types of strategies rely more on the sustained changes in realized volatility, therefore if volatility remains high, it will amplify the selling pressure from these two strategies. Goldman Sachs stated that the realized volatility of the S&P 500 is on the rise, but the 20-day indicator is still below the levels of November and December last year.

Seasonal Factors and Retail Investor Buying Fatigue Weaken the Rebound Power

Goldman Sachs believes that the seasonal support for the market is limited. Historically, February is usually a weaker and more volatile month for the S&P 500 and NASDAQ-100, as the supportive capital flows from January (including pension contributions and peaks in retail trading activity) gradually fade.

Retail investor capital is also showing signs of cooling. After a year of "buying the dips," the latest two-day net retail imbalance data shows a net sell-off of about $690 million last week, indicating a decrease in the willingness to "buy all dips." Popular retail trading linked to cryptocurrencies and related stocks has suffered a more pronounced impact.

Goldman Sachs believes this increases the risk of broader capital outflows from U.S. stocks, which will differ from last year's more singular trading patterns.

Aftermath of Last Week's Severe Volatility: A Rebound Does Not Necessarily Mean Risk Has Eased

The S&P 500 rose 2% last Friday, marking the largest single-day gain since May, nearly erasing the sharp drop earlier in the week, but the previous round of declines was equally fierce.

According to Bloomberg, market volatility is related to Anthropic PBC's launch of new AI automation tools, which caused investors to reassess "disruption risks," leading to the evaporation of tens of billions in market value for software, financial services, and asset management stocks.

Goldman Sachs noted that last Friday, the most frequently asked questions from its clients focused on the positions and capital flows of systematic strategies. This also reflects that in an environment where liquidity is thinning and derivative hedging mechanisms may amplify volatility, short-term prices are more easily dominated by "trading flows" rather than fundamentals.