"We Ran The Numbers": Goldman Trading Desk Warns "What Happens Next Isn't Encouraging"

At the start of the week, former Goldman flow guru (and current Citadel flow guru) gave some sense of hope to the bull, writing that his market capitulation checklist "has not yet fully healed; however, as futures rebound this morning, it is clear that the reflexive squeeze and short-covering bid remains elevated. Many of these technical, flow-of-funds dynamics continue to create air pockets in both directions."

Five days later, including one painfully aborted rebound in futures, and an even more painful 2% drop in the S&P - which is now down 5 weeks in a row, dragging the index below all key moving average and all key technical supports including CTA sell thresholds, and the capitulation checklist is almost complete. 

Sure enough, in a weekend note from Goldman veteran trader, Cullen Morgan, "Friday was one of the more uncomfortable sessions in recent memory... The S&P 500 closed lower for its fifth consecutive week, something that’s happened only a handful of times since 1970", most recently during the recession scare in 2022. Not even the covid crash or the Liberation Day meltdowns saw the S&P drop 5 weeks in a row.

Using this limited data set, the Goldman trader "ran the forward returns after previous instances… they aren’t very encouraging"

Morgan admits that a lot of the charts Goldman looks at are not screaming oversold just yet, but as the Goldman trader notes, there are handful starting to show signs of capitulation. "Here are a few we have had on our radar" according to Morgan:

From the latest Goldman Prime Brokerage Weekly Rundown note (available to pro subs): Hedge funds net sold US equities for a 6th straight week and at the fastest pace since Apr ‘25, driven by short-and-long sales in Single Stocks and to a lesser extent short sales in Macro Products. 

• On a trailing 6-week basis, the recent US net selling by hedge funds is the third largest over the past decade and starting to approach the levels seen in Apr-May ’20 during Covid and (to a lesser extent) into Liberation Day. 
• US Fundamental Long/Short Net leverage fell -3.1 pts this week: the sharpest weekly reduction since early Apr ’25 (week of Liberation Day). 

Goldman's US Vol Panic Index continues to be extremely elevated, with its latest reading of 9.2/10. "We have now been in ‘panic’ territory for 17 consecutive sessions (above 8.5) – One of the longest streaks in the last 15 years."

Goldman's broader US Equity Sentiment Indicator dropped to -0.9 this week, reflecting a large outright reduction in equity exposure. Sentiment Indicator levels below -1 have historically been predictive of above-average equity returns, although the signal improves when the indicator drops even further, below -1.5. 

Yet while it has felt like an incredibly volatile environment, the close-close moves haven’t been that extreme, when compared to the intraday price action. Over the last month we have averaged a +/-1.3% intraday move, but on a close-close basis, realized volatility is still sub 15 vol. At the same time, 1-month implieds have reset dramatically higher: SPX 1-Month Implied Volatility is now 26v: "The spread of implied to realized vol is one of the widest we have ever seen", according to Goldman.

Despite the move lower in spot, S&P skew has actually flattened aggressively. This pattern was something observed throughout 2022, and re-emerging now: a massively hedged investor base via options or macro products (ETFs/futures), unwinding of hedges/sellers of vol on down days, and call buyers to hedge shorts or add beta in case of a snapback, can all be contributed to this correlation breakdown. 

Over the last month, S&P spot and S&P normalized put-call skew have traded with a 70% correlation (spot up, skew up // spot down / skew down). 

Turning to the Nasdaq, it is now officially in correct, down more than -11% from its all-time highs. Under the hood, less than 15% of NDX constituents are above their 50DMA, which has historically signaled a near term bounce.

Turning to technicals, clearing the March month-end should be a significant event from a technical lens. That's because following the recent record $5+ trillion triple witching opex, dealer gamma has fallen off a cliff and is now at peak-short levels. As of Fridays close, dealers are short over -$7bn of gamma (the second lowest reading on record). The good news is that Goldman expects this short gamma pocket to roll off at the end of the month. 

One modest offset to the relentless liquidations should come at month end when Goldman sees demand from US pensions for month-end. US pensions are modeled to buy $19bn of US equities for month-end (89th percentile). 

Another bullish catalyst is for those who believe in seasonality voodoo: April has historically been a strong month for stocks, averaging +1.35% since 1950

A more credible bullish inflection point comes from the systematic community which is running out of steam. through Thursday’s close, Goldman estimates that this cohort has sold -$85bn of US equities over the last 30 sessions, a near record amount. 

According to the bank, CTAs are now short -$37bn, a potential springboard from any positive news hitting the tape, or as Morgan puts it "asymmetry lives to the upside -- over the next month, we estimate CTAs are buyers in every scenario." 

Amid all this, and despite the Easter-shortened week, the options market is implying over a 3.4% move for the S&P. Not quite as extreme as we saw last year, but still one of the largest 1-week implied moves we have had over the last five years. 

Morgan concludes his weekend note with one final point: "Taking a step back, a de-escalation will likely induce a violent snapback, but the overall picture for equities is still murky. We have ongoing AI disruption and private credit concerns on the backburner, yet still a major overarching worry for investors."

That said, one asset which according to the Goldman veteran looks like it can have a sustained, high beta rally post de-escalation is Gold. The precious metal has sold off over 17% from its highs and positioning is significantly cleaner here. Implied volatility of puts are now trading over calls (extremely unusual for Gold). Morgan likes GLD risk reversals or call spread collars as a way to add upside exposure here. 

Much more in the full Saturday chart pack from the Goldman volatility guru available to pro subscribers.