Goldman Sachs Traders Warn of More Stock Selling in a Volatile Market
Goldman Sachs clients are increasingly focused on “systematic strategies” and financial flows after a week of intense market movement. Despite a recovery on Friday, the firm’s trading desk warns that US stocks may face more selling this week from trend-following algorithmic funds.
Systematic Selling Regardless of Market Direction
The S&P 500 has already dropped below the price level that triggers selling for Commodity Trading Advisers (CTAs). These funds trade based on market direction rather than a company’s business value. Goldman expects these funds to remain net sellers over the next week, even if the market moves higher.
If the market declines, it could trigger $33 billion in selling this week. If the S&P 500 falls below 6,707, that selling could reach $80 billion over the next month. Even if the market stays flat or rises, CTAs are still expected to sell between $8.7 billion and $15.4 billion in US stocks.
High Investor Stress and “Max Fear”
Investor stress spiked last week. Goldman’s “Panic Index,” which tracks various market volatility measures, reached a level indicating that markets were close to a state of “max fear” on Thursday.
While the S&P 500 jumped 2% on Friday—its biggest gain since May—it followed a massive mid-week drop. That sell-off was sparked by the launch of a new AI tool from Anthropic PBC. The news caused investors to worry about disruption, wiping billions of dollars off the value of software and financial stocks.
Liquidity Challenges and Choppy Trading
Two factors are likely to keep the market volatile: low liquidity and “short gamma” positioning.
Market liquidity has dropped sharply. The volume of available buy and sell orders has fallen from a yearly average of $13.7 million to just $4.1 million. Goldman’s trading team noted that because it is harder to trade quickly, price swings will be sharper and the market will take longer to stabilize.
Additionally, option dealers have shifted their positions. Previously, their positions helped prevent the market from rising too high. Now, they are positioned in a way that could make price swings even larger. As the traders put it: “Buckle up.”
Other Risks to Market Stability
Other types of funds also have room to reduce their risk. Risk-parity and volatility-control funds respond to sustained market swings. If volatility stays high, these funds may begin to sell off their holdings as well.
Seasonality is also a factor. February is historically a weak and choppy month for the S&P 500 and Nasdaq 100. The positive “January effect,” driven by retirement contributions and New Year retail activity, is starting to fade.
Retail Investors Are Cooling Off
Finally, everyday retail investors are showing signs of fatigue. After a year of “buying the dip,” data shows that retail investors sold roughly $690 million last week. Popular trades in crypto and crypto-linked stocks have been hit hard, suggesting that the aggressive buying patterns of last year may be shifting.
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