Sell-off storm arrives! Net selling by long funds hits a record high, retail inflows plunge 43% since the conflict began.

The US stock market is experiencing a rare multi-party resonant sell-off storm. Institutions and retail investors are retreating synchronously, and market sentiment is deteriorating rapidly.

On March 20, Goldman Sachs' trading desk data showed that pure long funds had a single-day net stock sell-off of $9.6 billion on March 20, setting a record high since 2022 when the firm started keeping records, and Goldman labeled this a "5-standard-deviation event."

Meanwhile, JP Morgan data show that retail investor fund inflows this week fell by 15% week-on-week, and have plunged 43% since the outbreak of the Iran conflict, with the "buy-the-dip" strategy facing an unprecedented confidence crisis.

The background of this sell-off storm is continued turmoil in the Middle East. High oil prices, lack of market direction, and a reassessment of AI’s ultra-large-scale capital expenditures are suppressing investors’ risk appetite. Goldman Sachs warns that as the end of Q4 approaches and options expiry leads to further deterioration of traders' gamma exposure, any downward reversal will be amplified by negative gamma effects, and the market still has room to absorb more panic sentiment.

Historic Sell-Off: Pure Long Funds Set Single-Day Net Sell Record

Goldman Sachs trading desk data showed that pure long funds' net sell-off reached $9.6 billion on March 20, surpassing the previous record of $8.8 billion set on July 31, 2025, making it the largest single-day net sell in the firm’s database history. Goldman Sachs characterizes it as a "5-standard-deviation event."

This sell-off was broad, covering all sectors, with technology, media & telecom (TMT), consumer, and industrial sectors showing the strongest selling bias. Goldman trader Mike Washington noted that overall activity for the day rated 7 out of 10, clearly higher than previous consecutive sluggish days, with final trade volume leaning 15% towards selling compared to the 30-day average.

In contrast, hedge funds had a slight net buy of $750 million, with buying mainly from macro products, alternative assets, and scattered covering needs in healthcare.

Market Structure: Hedge Unwinding Triggers "Capital Cleansing"

This large-scale sell-off is not an isolated event, but rather a concentrated release of previous structural market accumulation. Nomura Securities’ Charlie McElligott previously pointed out that institutional selling of S&P 500 futures is near historical records, ETF short positions are also near historic highs, and Wall Street has actually over-hedged for a major risk-aversion scenario.

However, excessive hedging has created a "most distorted scenario": the stock market is consolidating sideways rather than crashing, so downside hedges fail to deliver, forcing investors to continually bear the costs of hedging. As high volatility mechanically compresses positions, hedges are gradually unwound, and the resulting delta covering actually provides market support, forming the paradox of "the more it falls, the more buyers step in."

This week, VIX and S&P 500 futures diverged—volatility fell sharply while stocks accelerated risk-off, which ultimately evolved into a concentrated "capital cleansing" on the morning of March 20. Intraday stocks fell nearly 1%, but after comments from Israeli Prime Minister Netanyahu, there was a strong late-session rebound, and stocks ended slightly lower.

Retail Retreat: A 43% Drop Marks the Waning Wealth Effect

The turmoil among institutions is also spreading to the retail market. According to JP Morgan’s weekly retail radar report, for the week ending March 18, retail fund inflows dropped to $5.7 billion, below the 12-month average of $7 billion/week. ETF purchases fell about 22% week-on-week, while single stock purchases remained at about the 45th percentile of the past year. Since the outbreak of the Iran conflict, total retail investment has fallen by 43%.

JP Morgan attributes this trend to two mutually reinforcing factors: first, high oil prices and daily high market volatility have suppressed risk appetite; second, retail investor portfolios’ profit and loss situations are worsening—although year-to-date remains positive, since the conflict broke out, some early gains have been taken back, and the wealth effect is clearly fading.

JP Morgan cites historical experience from the inflation period after the 2022 pandemic, noting that rising gasoline prices and CPI eroded the growth of retail portfolios and significantly slowed trading activity; only after inflation retreated from its peak and stabilized did buying behavior gradually recover.

Despite overall caution, retail investors’ thematic allocations in single stocks have not fundamentally changed. AI data centers and electrification-related targets remain the main buying directions. Notably, there’s a clear rebound in relative volumes of energy-related call options in the options market. Retail investors were faster than institutions in positioning for oil-sensitive stocks outperformance, which contrasts with behavior during the Russia-Ukraine conflict. JP Morgan points out that during major oil supply shocks, the historical correlation between the S&P 500 and oil prices tends to weaken and ultimately turn negative, reflecting margin pressure and tightening financial conditions.

The Game Between Negative Gamma Risk and Ceasefire Expectations

Goldman Sachs remains cautious about the future. Its derivatives traders point out that dealers are currently in a gamma short position, and any downward move will further deepen that short exposure. Goldman estimates that if the market falls 1.5%, dealer gamma exposure will widen to around $5 billion short, and quarter-end rebalancing is expected to have a larger impact than this Friday’s quadruple witching expiry.

On the geopolitical front, Goldman Sachs draws on market patterns from the Russia-Ukraine conflict and reminds investors: ceasefire negotiation news is often the first major catalyst, but history shows that the day after such news is released is usually a time to take profits, not a signal to chase gains. Goldman Sachs Delta One head Rich Privorotsky stated, whether Iran allows the US to find a political exit or continues to exert soft pressure through the Strait of Hormuz will be the key variable determining market direction.

Given that the stock market still has room to absorb more panic sentiment, Goldman currently prefers holding short Delta structures and put spreads on the S&P 500 or Nasdaq 100.

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