Goldman Derivatives Desk: "Signs Of Fear & Contagion Are Everywhere, But It's Credit That Is Scariest"

One week ago, when discussing the latest note from Goldman derivatives guru Brian Garrett, we summarized his view as follows: "Investors Brace For Crash As Desk Activity Is Indicative Of VIX At 35." And while there is still no crash at the broader index level, some of the moves at the single stock level are unlike anything seen since the Global Financial Crisis in 2008. 

Let's back up a bit. 

It may seems like an eternity ago, but it was just last Friday that markets were freaking out about AI disruption, return on chatbot investment, the software shakedown, record market dispersion, private credit blow ups and much more. And then we got a war with Iran and a Straits of Hormuz blockade on top of it all.

Or, as Garrett put it best in his latest Weekend Prep note (available to pro subs), "February was a long year" although one can say the same for every month since Trump entered the White House: what started as a single stock flinch early in the month (AI insulated vs not) turned into an index flinch mid-month (put vol skew repriced to decade highs and VVIX ripped), and finished with the first signs of credit flinch (CDX IG widened 5 points on the week, most since last summer, and put OI elevates). Garrett says that "of all these, the credit flinch worries me the most" and we agree fully, as we described in "Credit Markets Finally Crack As Private Credit Contagion Infects Public Markets."

Amid all this, flustered investors continue to look for safety in a market that offers little respite: index skew remains multi-year highs...

... relative single stock implied volatility set to be highest since global financial crisis...

...  and open interest in credit ETF hedges all time highs, as traders turn to hedge the coming credit crash.

To the Goldman veteran, all these signs of fear and contagion are hiding in plain sight, and yet retail remains unfazed (feels like every day you get a competitor sound byte that “retail is in 100th percentile of demand for this day in history”).

Sooner or later, it will all crack and the market will catch down to individual stock instability. 

Turning to his preferred trades, Garrett says that he is a believer in the “HALO” acronym – heavy assets, low obsolescence (discussed extensively here and here). Garrett says that a good note he read this week, sets the tone for current environment:

"for 20 years the investing world ran on one assumption: asset-light beats asset-heavy … software beats shovels … code beats copper … winners scaled infinitely with near zero marginal cost (no trucks, no factories, no heavy equipment … just servers and algorithms) … this is reversing, and its reversing fast." 

To be sure, all that $740 billion in 2026 capex has to go somewhere and there will be beneficiaries with real fundamentals (Goldman's Ben Snider put out a lot of great charts / data / winners on this theme (here).

What follows are the top observations from the Goldman derivatives guru:

1. Prime Brokerage: the selling in US equities continues, with Goldman Prime reporting the second straight week of selling us equities, and the pace is increasing, driven by long-and-short sales. Hedge funds net sold US single stocks at the fastest pace since liberation day. 

 
2. Prime Brokerage (ii): The flight to safety within equities continues (and its getting even more selective) - healthcare and saples were the only two sectors bought this week (everything else was sold). These two sectors are the only two that have seen net demand YTD 2026 (and valuations reflect that). All US cyclical sectors – Energy/Materials/Industrials/Financials/Real Estate – were net sold this week and collectively saw the largest net selling since Liberation Day (-1.9 SDs 5-year), driven by long-and-short sales. US Cyclicals long/short ratio now stands at 1.79 (vs. YTD high of 1.89 seen in late January), in the 54th/45th percentiles vs. the past year/five years.

3. Prime Brokerage (iii):  

• TMT (Info Tech + Comm Svcs) stocks were net sold for a second straight week and 3 of the last 4, driven by short-and-long sales (3 to 1). Unlike prior weeks when net flows diverged meaningfully on a subsector level, most of the subsectors were net sold this week, led by Software as well as Semis & Semi Equip (particularly on Thurs post NVDA earnings), and to a lesser extent IT Services, Telecom Services, and Internet.
• On the other hand, hedge funds continued to move into Health Care stocks having net bought the sector for a second straight week (+1.2 SDs 1-year), driven by risk on lows with long buys far outpacing short sales (3.5 to 1). US Health Care has been net bought in 7 of the last 8 weeks on the Prime book and is now by far the most net bought sector YTD (and one of the only two net bought sectors YTD; the other is Industrials). Hedge funds are now O/W Health Care stocks by more than +12 pts vs. the Russell 3000, the most overweight level in more than five years

 
3. Futures: for once the equity CTA data is not top of mind, instead it's the bond market situation: global CTA managers are going to continue buying government bonds for at least the next week (couple that with potential “risk off” flows and its easy to see yields overshoot to the downside)

4. Derivatives (i):  Single stock vol remains very high. The implied vol spread from now to year-end suggests that single stocks will be more volatile vs the index at a degree last implied in October 2008 

5. Derivatives (ii): For those willing to take a shot to the upside (you will be alone here), the NDX 3 month -20% put fully funds the 3 month 10% call. In other words, the Nasdaq 1m Put-Call skew is sitting around the steepest levels we have seen since the covid era due at the AI disruption that has engulfed the tech space. This provides an attractive opportunity to sell downside to play for a bounce. Currently in the 1 month space in QQQ, you can sell the down 80% put to fund the ~107% call for costless. These structures are at their most attractive levels in over 3 years (avg is 13% OTM).

6. Derivatives (iii): As mentioned above, the fear in L/S books to start the month found its way into index and finally has found its way into credit. CDX flinched this week vs VIX (chart)...

... and last few times CDX traded in the mid 50s. the SPX was about 1500 points lower. 

 
7. ETFs: The demand for equal-weighted S&P remains insatiable. According to Garrett, what a lot of portfolios right now want is to be long equities without being max long mag 7. As a result, RSP AUM is up almost 30% in the last 3 months ($90bn last, about 2x the size of DIA). 

More in the full Garrett Weekend Prep and Goldman Weekend Rundown notes available to pro subs.