The Goldman Sachs trading desk observed that the shares outstanding of the IGV software ETF, a market bellwether, have dropped to their lowest level in nearly five years, indicating that selling pressure has largely subsided.
More importantly, clients have begun unwinding index hedge positions, which is often a precursor to market bottoms. Institutional investors started buying IGV on Wednesday and Thursday, with the fund’s shares outstanding surging by 12% on Wednesday alone, marking the largest increase since 2023.
After a trillion-dollar sell-off in U.S. software stocks, Goldman Sachs' trading desk observed signs of a market bottom. The bank's trading desk noted that during eight consecutive days of sharp declines, holdings in software ETFs were significantly reduced, with institutional investors beginning to attempt bottom-fishing, potentially signaling the end of this historic correction.
AI application software stocks in the U.S. market rebounded strongly today, $SoundHound AI (SOUN.US)$ the stock surged nearly 8%, $Snowflake (SNOW.US)$ rose more than 6%, $Applovin (APP.US)$ 、 $Unity Software (U.US)$ rose more than 5%.
Software stocks plummeted 15% over the past week and have fallen cumulatively by 29% from their peak in September of last year. As a market indicator,$iShares Expanded Tech-Software Sector ETF (IGV.US)$has set volume records for two consecutive days in its 25-year history, with more than 85 million shares traded since Tuesday this week. The Goldman Sachs trading desk activity reached an intensity score of 8 out of 10, as institutional clients sold a net $2 billion.
Despite the ongoing sell-off, Goldman Sachs' trading division identified key turning signals: the shares outstanding of IGV have dropped to near five-year lows, indicating that selling pressure has largely subsided. More importantly, the bank's derivatives trading desk observed that clients began unwinding index hedge positions, often a precursor to market bottoms. Institutional investors started buying IGV on Wednesday and Thursday, with the fund seeing a 12% increase in shares outstanding on Wednesday, marking the largest single-day rise since 2023.
This optimistic assessment at the trading level contrasts sharply with the pessimistic outlook from Goldman Sachs' strategy department, highlighting current market divergence over the future of the software industry.
Trading Desk Observation: Signs of Exhausted Selling Pressure Emerge
Goldman Sachs ETF Trading Desk Key Focus$iShares Expanded Tech-Software Sector ETF (IGV.US)$observed unusual trading activity in the fund. This week, it became the primary vehicle for clients to gain exposure to software stocks, with ETF trading accounting for 37% of total volume. By 11:00 AM EST, over 11 million shares had already traded hands.
More critically, changes in holdings showed that IGV's shares outstanding hit a near five-year low earlier this week, indicating that previous long positions had been substantially liquidated. Data from Goldman Sachs' research division revealed that large mutual funds had already reduced their software stock allocations to underweight levels by mid-last year.
Goldman Sachs' derivatives trading desk captured subtle shifts in market sentiment. The bank's U.S. panic index rose to 8.3 (at the 89th percentile over a three-year look-back period), but the trading desk observed clients beginning to sell put options to monetize gains, betting that the current sell-off might be nearing an end. After the S&P 500 broke below its 100-day moving average, clients were adjusting their positions, with "expectations for a sharp rebound in equity indices to all-time highs having cooled."
Institutional Capital Begins Testing the Bottom
Following multiple days of institutional selling, Goldman Sachs' trading desk finally observed institutional buyers entering IGV on Wednesday and Thursday. Shares outstanding for the fund surged 12% on Wednesday, marking the largest single-day increase since 2023. Goldman Sachs interpreted this as "a sign of direct buyers attempting to find a bottom, along with potential short-covering."
According to data from Morgan Stanley, as of 1:00 PM Eastern Time, retail investors net purchased $1.7 billion worth of stocks, placing at the 50th percentile for that time of day and exceeding the average level by approximately $115 million. Among this, $1.3 billion flowed into ETFs while $435 million went into individual stocks, signaling a return of bargain-hunting capital.
However, systemic selling pressure has not yet fully abated. Morgan Stanley estimates that if$S&P 500 Index (.SPX.US)$closes down 1.5%, it will trigger $30 billion in stock sales, while a decline of 2% would result in sell-offs totaling $45 billion. Due to thin market liquidity, Goldman Sachs' derivatives trading desk noted 'extreme internal volatility in the markets this week,' meaning even small-scale buying could lead to sharp rebounds.
A Pessimistic Tone from the Strategy Department
Contrary to technical bottoming signals observed by the trading desks, Goldman Sachs’ strategy team remains cautious about the long-term outlook for the software industry. In their latest report, analyst Ben Snider and his team drew parallels between the current state of the software sector and the newspaper industry disrupted by the internet in the early 2000s, as well as the tobacco industry hit hard by regulatory measures in the late 1990s.
Goldman Sachs believes the recent valuation decline reflects not short-term profit fluctuations but fundamental doubts about whether the software industry can sustain long-term growth and profit margins. Drawing such an analogy between software stocks and the 'newspaper industry' underscores Wall Street’s heightened concerns over AI's impact on traditional software business models, which have now reached an extreme phase.
This divergence highlights the core contradiction facing the market: oversold signals at the trading level versus structural concerns at the fundamental level. For investors, short-term technical rebound opportunities must be evaluated separately from uncertainties regarding the long-term prospects of the industry.
Editor/Melody
