Goldman Sachs trader: U.S. stocks will face continued selling pressure this week.

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After the strong rebound of US stocks last Friday, the selling pressure has not been relieved. Goldman Sachs' trading team points out that trend-following funds may continue to sell this week; combined with weakening liquidity and a negative gamma pattern in the options market, US stocks may remain volatile with amplified swings.

According to Bloomberg, Goldman Sachs' trading desk notes that the S&P 500 index has triggered the short-term threshold for trend-tracking strategies (CTA) to reduce positions. These system strategies, which trade with the trend rather than based on fundamentals, are expected to maintain net selling over the next week, regardless of market direction.

Goldman Sachs' estimates show that if the market weakens again, about $33 billion in selling could be triggered this week; if the market rises, about $8.7 billion in selling could still be triggered. For the market, this means that even if the index rebounds, it may more easily encounter "upside resistance" due to outflows.

Goldman's trading desk also emphasizes that order book liquidity has thinned noticeably, and option dealers' positions have shifted from positive gamma to negative gamma, which could make intraday swings more violent. At the same time, other strategy funds (such as risk-parity and volatility-control strategies) still have high positions, and as retail inflows weaken, downside risk to the market increases.

CTA Selling: "Trend Reduction" May Be the Main Theme This Week

Goldman Sachs states that the S&P 500 has crossed the CTA's short-term trigger point, prompting them to sell stocks. The bank expects CTAs to continue net selling in the coming week and provides different capital flow estimates under various market scenarios:

1. If the market moves sideways, CTAs are expected to sell about $15.4 billion of US stocks this week

2. If the market rises, about $8.7 billion could still be sold

3. If the market falls again, about $33 billion in selling could be triggered

What's more notable is the "threshold effect". According to Goldman data, if the S&P 500 falls below 6,707 points, up to about $80 billion of additional systematic selling could be released in the next month, providing a potential amplifier for a market downturn.

Thinner Liquidity and the Return of Negative Gamma Amplify Two-way Fluctuations

Beyond capital flow pressure, Goldman Sachs' trading team believes that microstructure factors will make the market more "bumpy". The S&P 500's top-of-book liquidity (the size available at the best bid/ask prices) has plummeted from a year-to-date average of about $13.7 million to about $4.1 million.

The Goldman trading desk team (including Gail Hafif and Lee Coppersmith) wrote in a Friday report to clients that the inability to quickly offload risk will exacerbate intraday volatility and delay overall price stabilization.

The structure of positions in the options market has also changed. According to Goldman Sachs, previously dealers were in a positive gamma region that helped suppress the index from breaking above 7,000; now, they are estimated to be in a negative gamma position.

When liquidity is thin, this structure makes dealers more likely to buy as prices rise and sell as prices fall to hedge their positions, further amplifying market swings.

Other Systematic Funds Still Have "Room to Reduce Positions", but It Depends on Persistent Volatility

Besides CTAs, Goldman notes that other systematic strategies also have significant room to de-risk: over the past year, risk parity strategies are currently at the 81st percentile of their positions (higher than 81% of the time over the past year), while volatility control strategies are at the 71st percentile.

Unlike CTAs, these two strategies rely more on the persistence of realized volatility, so if volatility remains high, the selling pressure from these two strategies will be amplified. Goldman notes that realized volatility of the S&P 500 has been rising, but the 20-day indicator is still below levels seen last November and December.

Seasonality and Weakening Retail Buying Diminish Rebound Strength

Goldman believes that seasonal factors provide limited support for the market. Historically, February is usually a weaker and more volatile month for the S&P 500 and Nasdaq 100, as January's supportive capital flows (including pension contributions and peak retail trading activity) gradually fade.

Retail funding has also shown signs of cooling. After a year of "buying every dip," the latest two-day retail imbalance data showed a net retail outflow of about $690 million last week, indicating reduced willingness to "buy every dip." Popular retail trades tied to cryptocurrencies and related stocks took a particularly heavy hit.

Goldman believes this raises the risk of broader rotation-related capital outflows from US stocks, in contrast to last year's more singular trading mode.

The Aftermath of Last Week's Sharp Swings: A Rebound Doesn't Necessarily Mean Risk Has Diminished

The S&P 500 rose 2% last Friday, marking its biggest single-day gain since May and nearly erasing the sharp mid-week drop, but the preceding plunge was equally intense.

According to Bloomberg, the volatility was related to Anthropic PBC’s release of a new AI automation tool, which caused investors to reassess "disruption risk" and wiped tens of billions of dollars from the market value of software, financial services, and asset management stocks.

Goldman Sachs states that last Friday, clients' most common questions focused on systematic strategy positioning and capital flows. This also reflects that, in an environment of thinning liquidity and derivatives hedging that can amplify volatility, short-term prices are more easily driven by "trading flows" rather than fundamentals.

Risk DisclaimerThe market has risks; investments need caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial conditions, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article fit their individual circumstances. Investment is at one’s own risk. ```