"Market hopes for a rate cut in December," says Goldman Sachs trader: Sentiment is gloomy, but many clients believe that if Bitcoin stops falling, U.S. stocks could still rally by year-end.

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Although the S&P 500 index has only retreated a few percentage points from its historical high, market trading sentiment has plunged to a freezing point. Goldman Sachs’ head trader Brian Garrett stated that despite a 100 basis point rebound on Friday, it was regarded as one of the "most failed" rebounds in recent years, with the trading desk atmosphere resembling that seen during a market crash.

Multiple technical indicators from Goldman Sachs show the market is in a dangerous zone: liquidity is drying up as volatility rises, S&P 500 gamma has turned negative, defensive sector rotations have intensified, systematic trading thresholds have been breached, and volatility indicators are flashing panic signals. The market is calling for a Fed rate cut in December.

This split in sentiment is evident in the data. The Nasdaq 100’s average daily trading range is close to 3%, the S&P 500’s is over 2%, and the S&P 500’s average daily options trading volume has reached a record $3.5 trillion, exceeding the total market value of the entire Russell 2000 index.

Nevertheless, some positive factors are emerging. Goldman Sachs points out that economic growth concerns may be exaggerated, liquidity conditions are likely to improve, and the AI productivity theme is gaining more attention in client discussions. Many clients view high-beta assets such as Bitcoin as indicators of risk appetite, believing that if Bitcoin’s performance improves, a year-end rally may restart.

Capital Flows: Defensive Rotation Accelerates

U.S. stocks have seen three consecutive weeks of buying, but investors continue to shift allocations toward the upper end of the defensive spectrum, buying healthcare and durable consumer goods sectors while selling "unprofitable" sectors. Notably, unprofitable tech stocks soared 65% from August to October but have plummeted 25% in the past month, with investors ramping up short activity.

Goldman Sachs’ research team’s analysis of institutional holdings data, covering trillions in assets under management, shows that both hedge funds and mutual funds are unanimously overweight in healthcare, while unanimously underweight in information technology—an unusually strong consensus.

Prime broker books show total exposure is at a high, with investors continuing to adjust allocations along the defensive sector chain. Thematic strategy teams summarize, "Clients have been in a buyer’s strike, and uncertainty around key themes has led to a more defensive posture, with flows skewed towards AI sector selling and momentum hedging."

Systematic Selling Pressure: Just Beginning

This week the S&P 500 finally broke short-term thresholds after testing that level twice previously. Currently, the S&P 500, Russell 2000, and Nasdaq 100 all show negative momentum, and large-scale stock supply is anticipated: a flat week could mean $50 billion of selling pressure; a flat month would see $62 billion—meaning the selling pressure is highly front-loaded.

Goldman Sachs’ futures strategy team says, "We've just breached the level, so technically, the selling is just getting started. In the sessions to come, the size and projected scale of selling could grow significantly." The team likens the situation to "the top of the first inning, two outs, but the bases are loaded for the away team"—it’s been only four days since breaking the short-term threshold.

Negative gamma is also not helping stabilize the market. Goldman’s gamma calculations show a value of minus $2 billion as of Friday, with no point in the near future expected to turn positive.

Derivatives Market: Panic Signals Flashing

Multiple stock volatility indicators have issued warnings. The "volatility pressure" index closed at 9.5 out of 10 on Friday. Top-level liquidity has evaporated, and Nvidia’s earnings sent implied VIX volatility soaring.

The Nasdaq 100’s average daily range is close to 3%, and the S&P 500’s exceeds 2%. These are far from calm levels, and implied volatility will only decline when these ranges narrow significantly—though it's an opportune time for intraday gamma hedgers.

It is worth noting that the S&P 500 options average daily trading volume now stands at $3.5 trillion, a record high, officially exceeding the total market capitalization of the Russell 2000 index (comparing the 2,000 companies’ market cap to the S&P 500 options’ nominal daily volume).

Positive Factors Begin to Emerge

Despite low market sentiment, Goldman Sachs highlights several potential positives: economic growth concerns may be overblown, Fed policy clarity, liquidity support, high uncertainty already priced in, and AI-driven productivity gains possibly extending to non-tech sectors.

As of November 17, the Atlanta Fed’s latest Q3 GDP forecast is 4.1%, which is quite high—especially as the cyclical/defensive sector ratio shows a classic head-and-shoulders top pattern. While several cyclical sectors, including regional banks, transportation, chemicals, low-income consumers, and small businesses remain weak, Goldman’s clients believe growth in H1 2026 should benefit from tax legislation and that middle-income consumers will see favorable tax revenue results—a notable divergence.

Liquidity conditions are expected to improve. Over the past month or so, repo rates have risen and volatility has increased, with reserve balances dropping to cycle lows. This prompted the Fed to announce at its October meeting that quantitative tightening will end this month. These pressures have proven more persistent than the Fed expected, so the Fed may begin buying Treasuries to expand the balance sheet at the start of the new year. With the Treasury cash balance falling and reserves being rebuilt, a slight improvement is anticipated in the coming week.

The AI productivity theme is gaining more attention in client conversations. If companies can use AI to boost productivity and generate more earnings, this will benefit non-tech S&P 500 sectors, but this is not yet reflected in stock prices. If realized in coming years, its value would surpass normal valuation premiums. Currently, this remains a hot debate.

Goldman believes the selloff since mid-October has centered on high-beta factors and hot themes such as quantum computing, Bitcoin-sensitive stocks, rare earths, and strategic national investments. Many clients view these as future risk appetite indicators, believing a Bitcoin recovery could spark a year-end rally.

Risk warning and disclaimerMarkets have risks, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account individual users’ unique investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their specific circumstances. Investing based on this is at your own risk. ```