Market "More Balanced" But "Still Fragile" Warns Top Goldman Trader

The S&P 500 is lower five of the last six weeks, Goldman Sachs Prime Book data shows US equities have now been sold for four straight weeks, nets and grosses are decreasing, hedge funds are actively adding to short products, and asset managers just sold a record amount of S&P futures (not a typo). 

Goldman Sachs top derivatives trader Brian Garrett notes that the average market participant has flinched and started moving their feet in earnest.

With markets facing continued downward pressure, this risk is that negative gamma could force a "spot dip, vol rip" scenario for the S&P 500.

A technical aspect that could be a net negative:

CTAs are in sell mode … a decent amount of unwinds are already behind us (-50bn over the last week)...

...but assuming the Goldman calculus is correct, things are set to get materially wors...

...$69bn to sell over the next week // $98 billion to sell over the next month 

A technical aspect that could be a net positive:

VIX expiry is this week...

The market will get back a lot of short tail and we could see some vol stress alleviate...

In English, a trading desk wont need to carry large es1 short / VIX future longs against a book short hundreds of thousands of VIX 20 thru 50 strike calls 

We went from a “this feels bad, layer on some puts” approach to a “this feels bad, sell some delta” approach...

...this trading base (higher shorts & lower nets) is being called out as the kindling for a “de-escalation rally” for few other reasons than that's what the market is used to.

Another “under the surface” sign of decreasing nets is the move in SPX skew …

We just saw one of the sharpest repricing of SPX skew in 3 years over the last week...

...as a reminder, the hedge to a book that is running large macro shorts is an SPX call.

Additionally, the March monthly expiration stands out as particularly important, according to SpotGamma.

Friday's OPEX represents one of the the largest expirations on record with roughly $1.3 trillion delta notional — about 30% of total market exposure — set to roll off.

Positioning is also relatively balanced with a nearly perfect 50-50 split between calls and puts.

Directional impact may heavily depend on how traders choose to reposition following this expiration.

The most significant structural factor to monitor is the JPM Collar position. This quarter, the collar consists of 35,000 contracts on an SPX 5,470 / 6,475 put spread with a short call at the 7,155 strike.

That structure expires at the end of March, and we expect a meaningful impact from dealer repositioning following the roll of the JPM Collar. As a result, quarterly expiration on March 31 remains a key date to watch for unusual options-driven dynamics.

Taken together, the Triple Witching OPEX makes for one of the most significant events of the past few months.

Depending on trader repositioning flows, this could serve as the turning point for stabilizing conditions, or tip the market into more volatility yet. This week also brings FOMC (3/18), creating yet another key date to watch.

With negative gamma dominant, skew elevated, and expiration dyamics ahead, the quiet range-bound market has now disappeared. 

But, as Goldman Sachs Managing Director Lee Coppersmith explains, Iran was not the most significant event in the markets last week and what that all means for the week ahead.

The biggest development over the past two weeks has been the sharp tightening in global financial conditions.

The GS Global FCI has risen more than 50bps over that span – the strongest tightening impulse since August 2023 and one of the largest moves outside of true crisis periods.

At the same time, several downside risks that had previously been discussed mostly in theory are now beginning to materialize. Oil has surged toward ~$100 on the Iran conflict, payrolls recently surprised to the downside, equities have corrected roughly ~5%, and early signs of stress are emerging in parts of the private credit ecosystem. None of these developments individually would derail the cycle. But as GS Research highlighted in February, what matters more is the stacking of shocks – and the combination of higher oil, weaker equities, tighter financial conditions, and emerging credit stress is now pushing the market into a more fragile regime (link).

From Feb 23rd :

Encouragingly, the market response so far has still broadly followed the historical playbook around geopolitical events. The S&P is down roughly ~5% from its January highs, broadly tracking the average path following past geopolitical shocks, while investor conversations have become noticeably more cautious and positioning has started to adjust beneath the surface.

That adjustment is now showing up across multiple parts of the positioning complex:

Hedge fund length has begun to moderate, with US L/S gross leverage falling roughly ~3.4pts last week – the largest decline in more than four months – while net exposure has edged lower as well. Our PB data tell a similar story: US equities were net sold for a fourth straight week, driven largely by shorting in macro products (index + ETFs).

After rising +8.3% last week, US-listed ETF shorts rose another +12.4% – the third-largest weekly increase on our record since 2016, behind only the April 2025 Liberation Day episode and roughly on par with March 2020 during Covid. As a share of total US gross MV on the Prime book, short exposure in macro products now sits at the highest level since September 2022 and in the 97th percentile on a five-year lookback.

Positioning in US equity futures has also started to reset. Non-dealer positioning declined roughly ~$29bn last week, bringing the total down to ~$240bn versus ~$300bn at the start of the year. Investors remain net long overall, but the speed of the recent reduction highlights that a meaningful amount of discretionary de-risking has already taken place.

Systematic positioning is contributing as well. Our team estimates systematic strategies have sold roughly ~$80bn of global equities over the last month, with CTA/trend followers driving the heaviest selling in the last week. The baseline still points to another ~$70bn of selling over the next week and ~$100bn over the next month, with US markets expected to account for an outsized share given increasingly negative trend signals. Put differently, a meaningful portion of the mechanical de-risking has already occurred – but selling pressure still lies ahead.  

Vol positioning has seen an even more dramatic reset.

After beginning the year near record short levels, asset manager VIX positioning has reversed sharply higher over the past week, with the move now screening alongside prior major volatility episodes:

1. Volmageddon (Feb 2018): +$70mm vega

2. Initial Covid shock (Feb 2020): +$62mm vega

3. US-China trade escalation (Aug 2019): +$48mm vega

4. US-China trade deterioration (May 2019): +$35mm vega

5. This past week: +$35mm vega

Taken together, this suggests that a community that spent much of the past year structurally short volatility has now pivoted aggressively toward protection — meaning a meaningful portion of the volatility positioning reset has already occurred beneath the surface.

So where does that leave us?

Our Vol Panic Index closed at 9.54 out of 10 – a very elevated reading and one that suggests the market is trading with significantly more internal stress than the headline index drawdown alone would imply. At the same time, several of the positioning rinses that typically accompany a pullback are now underway – gross is lower, macro shorts have surged, systematic length is being cut, futures positioning has come in, and vol buyers have re-emerged aggressively.

To me, that combination leaves the market in a more balanced but still fragile spot. Sentiment and positioning now look much better calibrated to the risks than they did a few weeks ago. The challenge is that the macro backdrop itself is becoming less supportive.

GS Research continues to emphasize that the distribution of outcomes for equities has become increasingly skewed to the downside. Elevated valuations, geopolitical uncertainty, and tighter financial conditions increase the probability of larger drawdowns even if the base case remains one of continued earnings growth. In a downside growth shock scenario where the market begins to price a meaningful deterioration in the economic outlook, the S&P could fall roughly ~5% further toward ~6300, consistent with a decline in positioning and a compression in the equity multiple toward ~19x.

History also reinforces the downside risks if the oil shock were to persist. During the major oil supply shocks of the past several decades – including 1974, 1980, 1990, and 2022 – the S&P declined by a median ~12% during the oil spike, with a median peak-to-trough drawdown of roughly ~23%. That said, the current backdrop is not as structurally vulnerable as many of those episodes given lower oil intensity in the US economy and significantly higher domestic energy production.

Within equities, the recent rotation also fits the historical playbook for this type of environment. Hedge fund consensus positioning has struggled as momentum leadership has reversed, with the GS Hedge Fund VIP basket down roughly ~6% in recent weeks and the average US fundamental hedge fund down roughly ~3% YTD. Historically, oil-shock and stagflationary environments have tended to favor Energy and Health Care, a dynamic that is beginning to reappear in both flows and positioning.

For a tradeable expression, we highlight our recently rebalanced Stagflation pair trade (GSPUSTAG Index). The Long basket (GSXUSTGL) consists of commodity equities and defensive compounders that historically perform well in stagflationary environments. The Short basket (GSXUSTGS) includes low-quality consumer discretionary, semis/hardware, consumer finance/regional banks, high-beta oil-input cyclicals, and high-flier tech names that historically struggle during stagflationary regimes.

More broadly, the market appears to be transitioning away from the cyclical acceleration narrative that dominated the start of the year and toward a regime where investors increasingly favor secular growth and stronger balance sheets over economically sensitive exposures.

Against that backdrop, Goldman Research highlights several key positioning themes:

1. Hedge downside risk

We like IWM puts and put spreads given elevated valuations and widening geopolitical risk. Stock correlations remain near historical lows, leaving room for correlations and index volatility to rise in a selloff.

2. Secular growth over cyclicals

Higher oil prices and increased uncertainty likely cut short the cyclical growth impulse expected for 1H26. The AI theme remains intact, and near-term opportunity continues to sit with AI infrastructure beneficiaries.

3. Solar = AI power demand trade

Data center electricity demand is expected to accelerate through 2030. Solar should benefit both from AI-driven power demand and higher energy prices, while trading around ~13x EV/EBITDA, roughly in line with the S&P.

4. Cybersecurity within software

We no longer recommend chasing the broader software rally. Cybersecurity is preferred given lower volatility in stress environments and growing cyber risk tied to geopolitical conflict.

5. Quality over low-quality

Slower growth and tighter financial conditions should challenge the recent rally in low-quality stocks (we like GSXULOWQ on the short side). Preference remains for strong balance sheets and large caps.

The bottom line

A meaningful portion of the positioning reset has already occurred.

The question now is whether the macro shock that triggered that reset stabilizes – or continues to tighten financial conditions further.

If oil stabilizes and credit stress remains contained, the recent de-risking could ultimately create room for the market to find its footing.

But if higher oil prices begin to feed more forcefully into inflation, credit, and growth expectations, the downside scenarios currently being discussed could become increasingly relevant.

Professional subscribers can read much more from Goldman's Sales & Trading team here at our new Marketdesk.ai portal