After eight consecutive days of selling, Goldman Sachs trading desk indicates: selling pressure has basically cleared, software stocks are bottoming.

After the trillion-dollar sell-off in US software stocks, Goldman Sachs' trading desk has observed signs of a market bottom. The trading desk noted that after eight consecutive days of sharp declines, software ETF holdings have been significantly cleaned out, and institutional investors have started trying to bottom fish. This may signal the end of the current historic correction.

Software stocks plunged 15% in the past week, accumulating a 29% drop from the peak in September last year. IGV Software ETF, seen as a market bellwether, set record trading volumes for two consecutive days in its 25-year history, with total trades exceeding 85 million shares since Tuesday. Goldman Sachs' trading desk activity hit 8 out of 10, and institutional clients net sold $2 billion.

Despite continued selling, Goldman Sachs' trading department has captured key turning signals: IGV's circulating shares have dropped to a near five-year low, indicating that most selling has cleared. More importantly, their derivatives trading desk has seen clients start unwinding index hedges, which usually precedes a market bottom. Institutional investors began buying IGV on Wednesday and Thursday, with the fund's circulating shares rising 12% in a single day on Wednesday—the largest increase since 2023.

This optimistic trading-level judgment contrasts sharply with the pessimistic expectations from Goldman Sachs' strategy department, highlighting current market disagreements about the software sector's outlook.

Trading Desk Observation: Signs of Selling Exhaustion

Goldman Sachs' ETF trading desk focuses on IGV Software ETF's unusual trading activity. The fund has become the primary tool this week for clients to gain software stock exposure, with ETF trades accounting for 37% of total volume. By 11am ET, over 11 million shares had traded that day.

More crucial are the position changes. IGV's circulating shares hit a five-year low earlier this week, showing prior long positions have been significantly wiped out. Goldman Sachs' research department data suggests that major mutual funds had already reduced their software stock allocations to low levels by the middle of last year.

Goldman Sachs' derivatives desk has captured subtle shifts in market sentiment. The US panic index rose to 8.3 (89th percentile over a three-year lookback), but the trading desk observed clients selling put options to lock in profits, betting the current sell-off may be ending. After the S&P 500 dropped below its 100-day moving average, clients are adjusting positions, and "market expectations for a major rebound to record highs have cooled."

Institutional Funds Testing the Bottom

After several days of institutional selling, Goldman Sachs' trading desk finally observed institutional buyers entering IGV on Wednesday and Thursday. On Wednesday, the fund's circulating shares surged 12%, the largest single-day increase since 2023. Goldman Sachs believes this "feels like direct buyers searching for the bottom and potential short covering."

Morgan Stanley's data shows that as of 1pm ET, retail investors had net bought $1.7 billion, ranking in the 50th percentile for that hour of the day—about $115 million above average. Of this, ETFs accounted for $1.3 billion and individual stocks for $435 million, indicating that bottom-fishing funds are returning.

However, systemic selling pressure has not been fully relieved. Morgan Stanley estimates that if the S&P 500 closes down 1.5%, it could trigger $30 billion in equity selling, and if the drop widens to 2%, selling could reach $45 billion. Due to thin market liquidity, Goldman Sachs' derivatives desk notes "extreme internal volatility in the market this week," meaning even small buying flows could trigger sharp rebounds.

Strategy Department's Pessimism

Unlike the technical bottom signals noted by the trading desk, Goldman Sachs' strategy department remains cautious about the software sector’s long-term prospects. Analyst Ben Snider and team, in their latest report, compare today’s software industry to the newspaper sector disrupted by the internet in the early 2000s and the tobacco industry hit by regulation in the late 1990s.

Goldman Sachs believes that the current valuation decline reflects not short-term profit fluctuations, but fundamental doubts about whether the software industry can sustain long-term growth and margins. Comparing software stocks to the “newspaper industry” highlights how Wall Street’s concerns about AI disrupting traditional software business models have reached extreme levels.

This divergence reflects the core contradiction the market faces: technical oversold signals at the trading level versus structural fundamental concerns. For investors, short-term technical rebound opportunities and long-term uncertainty about the sector’s outlook need to be evaluated separately.

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