Goldman Sachs trader: Last Friday’s performance in the U.S. stock market looked more like ‘protection’ rather than ‘exiting.’

Goldman Sachs trader Lee Coppersmith noted that last Friday, investors primarily managed risk through derivative instruments such as options rather than engaging in large-scale stock selling. Although options trading volume hit a record high, the trading of spot equities remained relatively calm, with S&P 500 trading volume only 9% above the average. The market is focused on potential triggers for systemic selling, as CTA strategy long positions are nearing their upper limit. Investor sentiment remains resilient, with the two key themes of AI development and labor market concerns persisting, which are expected to take center stage in the upcoming earnings season.

The U.S. stock market experienced significant volatility last Friday, with options trading volume hitting a record high. However, senior Goldman Sachs trader Lee Coppersmith noted that the market behavior appeared more reflective of investors rushing to protect their positions rather than exiting the stock market en masse.

Last Friday, trade and tariff-related news triggered concerns about a repeat of the market turbulence seen in April. However, according to Goldman Sachs trader Lee Coppersmith, while the options market was exceptionally active, cash equity trading remained relatively calm. The S&P 500 trading volume was only 9% above its 20-day moving average, indicating that investors were primarily managing risk through derivatives rather than engaging in widespread stock selling.

Data shows that the total trading volume of U.S. options surpassed the 100 million contracts mark for only the second time in history—the last instance being on April 4, when the market dropped by 5.97%. Put option trading volume reached the second-highest level on record, while call option trading volume hit a new all-time high, with over 60 million contracts changing hands.

(Put Option Trading Volume)

(Call Option Trading Volume)

Meanwhile, Coppersmith stated that although Goldman Sachs’ panic index reached a high of 9/10—last seen in mid-April—the implied volatility of the S&P 500 remains far from the levels observed in April or August, and implied correlations have not exceeded the two-year average.

Goldman Sachs traders believe there has been strong buying interest in both the implied volatility and skew of the S&P 500, which is also reflected in the flow of funds at Goldman Sachs’ trading desk. This phenomenon is mainly at the index level, rather than indicative of widespread selling at the individual stock level.

Technical concerns arise over systemic selloff triggers.

One of the market’s key focuses is on potential technical thresholds that could trigger a systemic selloff. Goldman Sachs estimates that systematic strategy funds hold nearly $220 billion in U.S. equities.

Specifically, CTA strategies have long positions in the S&P 500 totaling approximately $48 billion, close to the upper limit of their multi-year range. The short-term trigger threshold is at 6,580 points, which was breached last Friday, while the medium-term threshold is around 6,290 points. A break below these critical levels could result in negative fund flows.

Last Friday saw the largest drop in dealers’ gamma (γ) values in more than three years. Although dealers remain net long gamma, the degree has weakened. This shift reflects an accumulation of structural market risks.

Consumer finance sector faces notable pressure.

Consumer finance stocks are another area of focus. Trading activity among high-yield consumer finance issuers reached its highest level since early April, with corresponding volatility observed in related stocks.

However, Goldman Sachs Research believes this weakness is mainly due to specific circumstances rather than a broad repricing driven by recession risks. Key reasons include:

The broader services and retail sectors have not shown synchronized weakness, consistent with improving activity data and overall healthy consumer balance sheets; even within consumer finance companies, the weakness is concentrated among a few issuers.

Goldman Sachs expects this pressure to remain localized and not spread across the entire market.

Investor sentiment remains resilient, with two major themes continuing.

Prior to the volatility last Friday, investor sentiment in the U.S. stock market had actually been improving. Net inflows amounted to $14 billion last week, and Goldman Sachs’ sentiment indicator registered at +0.3, turning positive for the first time since February.

Passive fund inflows and retail margin debt remain one standard deviation above the 52-week normal level; however, the price action on Friday may have pulled the indicator back into negative territory.

Goldman Sachs traders believe that two dominant themes in the U.S. equity market remain largely unchanged: growth momentum driven by the continued advancement of AI, as well as headwinds caused by labor market concerns. These narratives will continue to take center stage during the third-quarter earnings season, which begins this week.

Major financial institutions will kick off earnings reports on October 14, with approximately 70% of the market capitalization of the S&P 500 expected to report results by the end of the month. The consensus expectation is for S&P 500 earnings per share to grow by 6% year-over-year, down from 11% in the second quarter, but Goldman Sachs Research anticipates another round of better-than-expected results.