Goldman Sachs trader: As we enter December, the U.S. stock market has a "clearer starting point"

Goldman Sachs' trading department believes that after the severe internal adjustments in November, multiple indicators of the U.S. stock market have now completed a "reset." The market has effectively corrected the extreme bullish positions in large technology stocks, improved market breadth, and alleviated approximately $16 billion in systemic selling pressure. As market panic subsides and the AI investment theme expands from technology sellers to application providers, the foundation of the U.S. stock market has become more solid as the year-end approaches

A turbulent November reset market positions and sentiment, providing a clearer path for U.S. stocks entering the final month of the year.

According to the latest observations released by Goldman Sachs' trading department on November 28, the market has shown positive signals before entering December, with multiple indicators including positions, breadth, volatility, and systemic capital flows resetting. The excessive bullish sentiment in large tech stocks has cooled down, the breadth of the market's rise has significantly improved, and the fear index has retreated, providing a "clearer starting point" for the U.S. stock market in December.

November Review: Overheated Expectations and "Style Factor" Turbulence

According to Goldman Sachs' top trader Shawn Tuteja, before entering November, the market generally held extremely high expectations for the year-end rally, with even some long-term bearish investors turning bullish. However, this overly consistent bullish expectation, combined with the impact of the Federal Reserve's hawkish stance on October 29, triggered a sharp market adjustment.

The report pointed out that the adjustment was mainly reflected in the internal structure of the market. For example, Goldman Sachs' unprofitable tech stock index (GSXUNPTC) fell about 23% from its peak to its trough, while the most shorted stock portfolio (GSXUMSAL) dropped about 29%.

Another trader, Lee Coppersmith, further explained that the real story of November was not the S&P 500 index itself, but the soaring volatility of "style factors" beneath the surface of the index.

Data shows that the 20-day factor volatility has risen above 20, while the volatility of the S&P 500 index has only increased moderately. This means that portfolios heavily betting on specific investment styles (such as growth stocks vs. value stocks, or AI winners vs. other stocks) have experienced much greater volatility than the overall market performance.

Market Reset Signals: Positions, Breadth, and Volatility Cool Down

The report believes that after the turbulence in mid-November, the market has cleared a lot of pressure, with multiple indicators showing signs of "reset":

Large Tech Stock Positions Return to Neutral: Previously, the market's bullish sentiment towards the seven major tech giants (Mag 7) was extremely crowded, with the skew of call/put options in their options market even inverted (call option prices higher than put option prices). This extreme bullish position was quickly reversed last week and has now returned to neutral levels.

Significant Improvement in Market Breadth: The participation in the market rally is expanding. The 5-day moving average of the number of advancing/declining stocks in the S&P 500 has rebounded strongly from -150 in early November (indicating severe damage beneath the surface) to the +150 range. This suggests that the rally is no longer limited to a few stocks but is seeing broader participation.

Cooling of Volatility Panic Sentiment: Goldman Sachs' "Volatility Panic Index" has retreated from this month's peak to 5, slightly above its 3-year average of 4.6. Several sub-indicators that make up this index, including implied volatility, volatility of volatility (vol-of-vol), and options skew, have all cooled down simultaneously.

Systematic Selling Pressure Weakens, AI Investment Theme Broadens

In addition to the improvement in market sentiment and technical indicators, the evolution of capital flows and investment themes also provides positive signals.

First, the process of de-risking by systematic funds has largely been completed. Goldman Sachs estimates that in the past month, systematic strategy funds have sold approximately $16 billion in the S&P 500 index. Looking ahead, the benchmark scenario for the next month has shifted to moderate buying (around $4.7 billion), significantly reducing the tail risk of forced selling triggered by systematic funds.

Second, the investment theme of artificial intelligence (AI) is broadening. The report notes that three years after the launch of ChatGPT, AI is finally beginning to reflect in corporate earnings.

Many companies in "old economy" sectors are launching practical AI tools related to cost reduction and profit enhancement. Goldman Sachs has introduced a new stock basket index (GSXUPROD Index) aimed at capturing the theme of "using AI, rather than selling AI," reflecting that AI is shifting from narrative to measurable productivity.

The report concludes that the long-term advantages of the U.S. in intangible asset investment, resource allocation efficiency, and corporate scalability remain, while the application of AI is becoming its next structural tailwind.

In summary, the release of factor turbulence, the resetting of large tech stock positions, the improvement in market breadth, the cooling of volatility, and the completion of de-risking by systematic funds have all provided the market with a "clearer starting point" as it enters December compared to a few weeks ago