The US market experienced rare, intense volatility across asset classes this week, driven by an unprecedented large-scale short-selling campaign by hedge funds, which later culminated in a brutal short squeeze on Friday.

According to Goldman Sachs' prime brokerage data, hedge funds achieved their highest single-day short selling volume in US equities since records began in 2016, with the ratio of short sales to long purchases reaching as high as 2.5 to 1. This wave of short selling swept through not only the stock market but also impacted precious metals and cryptocurrencies, leading to gold and silver's largest declines in decades and Bitcoin's most significant single-day drop since November 2022.

A turning point in market sentiment emerged on Thursday. Goldman Sachs observed institutional investors beginning to buy the IGV (Software Sector ETF), with the fund's shares increasing by 12% on Wednesday, marking the largest single-day increase since 2023. This signal suggested that the selling pressure might be finding a bottom.

The market then上演ed a short-covering rally on Friday. Goldman Sachs' basket of most-shorted stocks surged 8.8% in a single day, recording its second-largest gain since 2022. However, analysis from Goldman Sachs indicated that Friday's covering activity only absorbed approximately 20% of the accumulated short positions, implying that further short-squeeze conditions could persist.

**Unprecedented Scale of Short Selling** Goldman Sachs prime brokerage data revealed that hedge funds were net sellers of US equities for the fourth consecutive week, with the volume of short-selling transactions far exceeding purchases.

Single stocks were the primary target of the shorting. Goldman's records show that the nominal short selling volume in US single stocks this week hit a record high since 2016, equivalent to 3.2 standard deviations above the five-year average, with a short-to-long ratio of 2 to 1. Macro products like indices and ETFs also experienced net selling, accounting for 30% of the total net selling volume, entirely driven by shorting.

Eight out of eleven sectors saw net selling. The largest dollar-value net selling occurred in Information Technology, Consumer Discretionary, Consumer Staples, Industrials, and Real Estate. Healthcare, Communication Services, and Utilities were the only sectors with net buying.

**Software Sector as the Epicenter of Shorting** The Information Technology sector was the worst-performing and most heavily net-sold sector. The selling scale was the second-largest in the past five years, equivalent to 3.2 standard deviations below the one-year average, with an extreme short-to-long ratio of 5.4 to 1.

The software industry was the hardest-hit within this sector, accounting for 75% of the dollar net selling in Information Technology, followed by Communications Equipment and Technology Hardware. In contrast, Semiconductors & Semiconductor Equipment and IT Services were the sub-sectors with the most net buying. Goldman data indicates that the software industry's total net exposure (as a percentage of total US market cap) and long/short ratio currently stand at 2.6% and 1.3 respectively, both at record lows.

JPMorgan's Positioning Intelligence team noted that this equity decline and factor volatility dragged down hedge fund returns, with the average return across all global strategies down 1.8% for the month. Equity long/short strategies fell 2.0%, multi-strategy funds declined between 2% and 2.5%, and quantitative strategies were down 1% on a market-neutral basis.

**Key Buying Signal Emerges on Thursday** The pivotal shift in market sentiment occurred on Thursday. Goldman Sachs' ETF trading desk observed institutional investors beginning to purchase IGV on Wednesday and Thursday.

The fund's shares increased by 12% on Wednesday, the largest single-day change since 2023. Goldman traders interpreted this as "feeling like the culmination of direct buyers trying to find a bottom and participants potentially covering shorts."

Although JPMorgan's Positioning Intelligence team maintained a cautious stance on the market, pointing out that hedge fund leverage remains elevated and the four-week deleveraging in North American markets is only at -1.1 standard deviations, Goldman's trading team explicitly stated on Thursday that the software sector had bottomed.

**Short Squeeze Erupts on Friday** Friday's market action validated Goldman's assessment. Not only did software stocks rebound sharply, but previously battered high-beta assets like momentum stocks, Bitcoin, and silver also surged across the board.

Goldman Sachs' basket of most-shorted stocks skyrocketed 8.8% on Friday, marking its second-largest single-day gain since 2022. This short-covering rally impacted the market's most beaten-down sectors.

However, Goldman warned that Friday's short covering, at best, only digested about 20% of the recent buildup in short positions. This implies that unless short sellers double down on their bearish stance, a more extensive rally could occur on Monday, potentially spreading beyond just the market's worst-performing segments to other areas.