After eight consecutive days of selling, Goldman Sachs trading desk indicates: the sell-off is basically exhausted, and software stocks are bottoming out.

After the software stocks in the US stock market experienced a trillion-dollar-level sell-off, Goldman Sachs’ trading division observed signs of a market bottom. The firm’s trading desk noted that during the eight consecutive days of sharp declines, holdings in software ETFs had been significantly cleaned out, and institutional investors were beginning to try to bottom fish, which could signal that this historic correction is nearing its end.

Software stocks plunged 15% over the past week, down 29% from their September 2022 highs. The IGV software ETF, a market barometer, hit consecutive trading volume records for two days in a row in its 25-year history, with cumulative trading exceeding 85 million shares since Tuesday. Goldman Sachs’ trading desk activity scored 8 out of 10, with institutional clients net selling $2 billion.

Although the sell-off continues, the Goldman Sachs trading division detected key turning points: The circulating shares of IGV have fallen to a near five-year low, indicating that selling pressure has been largely cleared. More importantly, the derivatives trading desk observed clients beginning to unwind index hedges, which is often a sign of market bottoming. Institutional investors started buying IGV on Wednesday and Thursday, with the fund’s circulating shares increasing by 12% in a single day on Wednesday, the largest increase in 2023.

This optimistic trading perspective contrasts sharply with the pessimistic outlook from Goldman Sachs’ strategy department, highlighting current market disagreements over the prospects of the software industry.

Trading Desk Observation: Signs of Exhausted Selling

Goldman Sachs ETF trading desk focused on abnormal trading activity in the IGV software ETF. This fund has become the main tool for clients to gain exposure to software stocks this week, accounting for 37% of total trading volume. As of 11 a.m. Eastern Time, more than 11 million shares had been traded that day.

More critically, in terms of holdings changes, IGV’s circulating shares earlier this week touched a near five-year low, indicating that previous long positions have been significantly cleaned out. Goldman Sachs research data shows that large mutual funds had already reduced their software stock allocations to underweight levels by mid-last year.

Goldman Sachs’ derivatives trading desk also picked up on subtle shifts in market sentiment. The firm’s US VIX index rose to 8.3 (the 89th percentile over a three-year lookback period), but the trading desk observed clients starting to sell put options to lock in gains, betting that the current sell-off might be ending. After the S&P 500 index broke below its 100-day moving average, clients are readjusting their positions, “market expectations for a sharp rebound in stock indices to historical highs have cooled.”

Institutional Funds Begin to Test the Bottom

After several days of institutional selling, Goldman Sachs’ trading desk finally observed institutional buyers entering IGV on Wednesday and Thursday. On Wednesday, the fund’s circulating shares surged by 12%, the largest single-day increase in 2023, and Goldman Sachs believes this “feels like direct buyers trying to find a bottom and potential short covering.”

Data from Morgan Stanley shows that as of 1 p.m. Eastern Time, retail investors net bought $1.7 billion, placing them at the 50th percentile for that time of day, about $115 million above the average. Of this, ETF purchases amounted to $1.3 billion, and individual stock purchases totaled $435 million, indicating that bottom-fishing funds are starting to flow back in.

However, systemic selling pressure has not been fully alleviated. Morgan Stanley estimates that if the S&P 500 closes down 1.5%, it will trigger $30 billion in stock sales; a 2% decline would result in $45 billion in sales. Due to market liquidity being thin, Goldman Sachs’ derivatives trading desk pointed out that “internal market volatility is extreme this week,” meaning even small buy orders could trigger sharp rebounds.

Strategy Department’s Pessimistic Outlook

Contrasting with the technical bottom signals observed by the trading desk, Goldman Sachs’ strategy department remains cautious about the long-term prospects of the software industry. Analyst Ben Snider and his team, in their latest report, compare the current software sector to the newspaper industry disrupted by the internet in the early 2000s, and the tobacco industry hit hard by regulation in the late 1990s.

Goldman Sachs believes that the current valuation decline reflects not just short-term profit fluctuations but fundamental doubts about whether the software industry’s long-term growth and profit margins can be maintained. This analogy of software stocks to the “newspaper industry” underscores Wall Street’s extreme concerns about AI disrupting traditional software business models.

This divergence highlights the core contradiction facing the market: technical oversold signals versus structural concerns at the fundamental level. For investors, short-term technical rebound opportunities and long-term industry outlook uncertainties need to be evaluated separately.

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