Goldman Sachs Trading Department: U.S. stock market trends have triggered selling signals for systematic funds such as CTA

US stocks fell across the board on Wednesday, with the Nasdaq down 3%, potentially marking the worst single-day performance since late 2022. The S&P 500 is currently down 1.8%, marking its largest decline since March last year, the Dow is down over 0.8%, and the Nasdaq 100 is down about 3.1%. The Philadelphia Semiconductor Index fell over 4%, the banking index rose 0.6%, and small-cap stocks fell 0.2%. Tesla fell 10.4%, while Apple fell 3.1%.

The recent sharp drop in US stocks has sent warnings to trend-tracking funds: sell US stocks regardless of market trends.

According to Goldman Sachs' trading department model, both the S&P 500 and Nasdaq 100 indices have crossed the threshold triggering sell signals for Commodity Trading Advisors (CTAs). Scott Rubner, Managing Director and Tactical Expert at Goldman's Global Markets Division, stated in a client report that the team has simulated all scenarios that US systematic sellers may face in the coming week, including staying flat, rising, and falling.

If the stock market continues to decline, based on analysis from Goldman's trading department, these rule-based traders may withdraw $32.9 billion from global stocks, with $7.9 billion flowing out of the US market. Even if the market reverses its downward trend, CTAs may still sell $0.902 billion of US stocks. If a bear market takes over and the stock market continues to decline in the next month, trend traders may withdraw as much as $219 billion from global stock markets, with $67.1 billion flowing out of the US market.

Meanwhile, Goldman's FICC and Equity Futures Market Strategy Team stated that volatility is on the rise. Wall Street's fear gauge, the Cboe Volatility Index (VIX), surged 14% on Wednesday. The index has risen by over 30% since early July.

Analysts believe that this surge in volatility is also putting pressure on the US stock market. Rubner stated that volatility control strategies and ETFs shorting volatility have shifted from being based on index data to becoming key players in trading. These strategies typically glean insights from the volatility market. The recent rise in the VIX implies that these funds need to unwind their positions. "We are in a new state of volatility, and the overall exposure needs to be reduced."

The report also notes that this sell-off coincides with the market nearing a seasonal soft period, with the first half of August historically being one of the worst-performing periods of the year.

"August is the month with the highest outflows for passive equity funds and mutual funds throughout the year. The most important dynamic here is that inflows of passive funds will stop as buyers run out of ammunition."

Furthermore, a key technical indicator for US stocks is at historical extremes, indicating an overextended trend. According to data compiled by the media, last week the S&P 500 index was once 15% above its 200-day moving average. Data compiled by Andrew Thrasher, a technical analyst and portfolio manager at Financial Enhancement Group, shows that the deviation was greater than before the major drop in early 2018.

This indicator has previously signaled major downturns. In recent history, such a large deviation has only occurred after the low point following the global financial crisis in March 2009, the high point in February 2011, and the low point after the pandemic in 2021Thrasher said that while this does not necessarily mean that the market is about to crash, it is a warning signal for investors concerned about the high valuation of technology stocks and concentration risks