According to analysis from Goldman Sachs Group's trading division, following last Friday's U.S. stock rebound which nearly erased the week's significant losses, the market may face further selling pressure from trend-following algorithmic funds this week. The S&P 500 index has already fallen below the short-term trigger point that prompts Commodity Trading Advisors (CTAs) to sell stocks. Goldman Sachs anticipates that these systematic strategies, which are based on market trends rather than fundamental factors, will continue to be net sellers of equities over the coming week, regardless of market direction.
Goldman's analysis suggests that if U.S. stocks decline again this week, it could trigger approximately $33 billion in selling pressure. The firm's data indicates that if market stress persists and the S&P 500 falls below the 6,707 point level, it could activate up to an additional $80 billion in systematic selling over the following month. Specifically, if markets remain flat, CTAs are projected to sell around $15.4 billion in U.S. stocks this week. Even if equities rise, these trend-following systematic funds are still expected to sell approximately $8.7 billion.
Investor anxiety escalated significantly last week. The bank's proprietary panic indicator—which aggregates the S&P 500's one-month implied volatility, the VIX volatility index, the S&P 500's one-month put/call skew, and the slope of the volatility term structure—recorded a reading of 9.22 last Thursday. This level indicates the market is nearing a state of "extreme panic."
Last Friday, the S&P 500 surged 2%, concluding a volatile week and marking its largest single-day gain since May of last year. This followed a sharp decline earlier in the week for the S&P 500 and Nasdaq 100 indices. The downturn was triggered by Anthropic PBC's launch of a new AI automation tool, which erased tens of billions of dollars in market value from software, financial services, and asset management stocks in a single day. This volatility prompted investors to reassess disruptive technology risks in related sectors.
On Friday, Goldman Sachs clients frequently inquired about the positioning of systematic strategies, highlighting the market's urgent need for insight into fund flows. Beyond CTA selling pressure, current thin market liquidity combined with the effects of "short gamma" positions is expected to intensify market swings and amplify volatility in both directions. To hedge their positions, dealers often buy during rallies and sell during declines, creating a self-reinforcing mechanism for price movements.
Liquidity at the top level of the S&P 500 order book has deteriorated significantly. This metric, which measures the volume of buy and sell orders at the best bid and ask prices, has seen its average size plummet from approximately $13.7 million at the start of the year to around $4.1 million currently—a contraction of over 70%. This erosion of liquidity further weakens the market's ability to absorb shocks and heightens the risk of price volatility.
Goldman Sachs trading desk team members noted in a report to clients last Friday that an inability to transfer risk quickly will lead to more turbulent intraday moves and delay the stabilization of overall price trends. Positioning among options market makers has also shifted, potentially exacerbating market volatility. Previously, dealers were in a so-called "long gamma" position, which helped prevent the S&P 500 from breaking above 7,000 points. They are now estimated to be in a neutral-to-short gamma position. This dynamic becomes more pronounced when liquidity is scarce. The traders advised investors to "fasten their seatbelts."
Other systematic strategy groups still have significant room for de-risking. Data from the past year shows risk parity strategies are positioned at the 81st percentile, while volatility control strategies are at the 71st percentile. Unlike the trigger-based selling mechanism of CTAs, these strategy funds are more sensitive to sustained changes in realized volatility. If market volatility remains elevated, the impact of their de-risking actions could be more substantial.
Although the realized volatility of the S&P 500 is trending upwards, the current 20-day volatility measure remains below the peak levels seen last November and December. Seasonal factors show no signs of abating. Historically, February has been a weaker month with increased volatility for the S&P 500 and Nasdaq 100 indices. As supportive January flows—such as peak pension contributions and strong retail activity—fade, the market lacks sustained upward momentum.
Retail investor behavior is also showing signs of fatigue. After a year of consistently buying during dips, data from the last two trading sessions shows net selling by retail investors totaling $690 million, indicating a potential shift away from the momentum-chasing mindset. Notably, popular retail trading favorites strongly linked to cryptocurrencies and crypto-related stocks have been hit hard. This structural change amplifies market fragility. If a broader outflow of funds from U.S. stocks occurs, the trading pattern would differ significantly from last year's characteristic of rapid rebounds after declines.