Behind this week's big fluctuations in the US market: hedge funds "shorting everything", software stocks starting to attract buying interest on Thursday, and a "cruel squeeze" on Friday.

This week, the American market experienced rare extreme volatility across asset classes, driven by an unprecedented massive short-selling action by hedge funds, which then turned into a brutal short covering on Friday. According to Goldman Sachs prime brokerage data, hedge funds this week set a record for single-day short-selling of U.S. stocks since 2016, with a short-to-long ratio of up to 2.5:1. This wave of short selling not only swept through the stock market, but also affected precious metals and cryptocurrencies, leading to the largest declines in gold and silver in decades, and Bitcoin experiencing its largest single-day plunge since November 2022. Market sentiment turned on Thursday. Goldman Sachs observed that institutional investors began buying the IGV (software sector ETF), with the fund's shares increasing by 12% on Wednesday, the largest single-day increase since 2023. This signal suggests that selling may have bottomed out. Friday's market saw a surge in short covering, with Goldman's most shorted stock basket rising by 8.8%, the second largest increase since 2022. However, according to Goldman's analysis, Friday's covering only absorbed about 20% of the short positions, indicating that further short squeezing may continue. Unprecedented short-selling scale Goldman's prime brokerage data shows that hedge funds have been net selling U.S. stocks for the fourth consecutive week, with short trades far exceeding long trades. Individual stocks became a major target for short selling. Goldman's data shows that this week, the nominal short-selling volume of U.S. individual stocks reached the highest level since 2016, equivalent to 3.2 standard deviations above the five-year average, with a short-to-long ratio of 2:1. Indexes and macro products such as ETFs also experienced net selling, accounting for 30% of the total net selling volume, driven entirely by short-selling. Of the 11 industry sectors, 8 experienced net selling, with the largest in dollar terms including information technology, non-essential consumer goods, essential consumer goods, industrial, and real estate. Healthcare, communication services, and utilities were the only sectors with net buying. Software sector becomes short-selling focus The information technology sector was the worst-performing and most net-sold sector, with selling volumes at their second highest in the past five years, equivalent to 3.2 standard deviations below the annual average, with a short-to-long ratio of 5.4:1. The software industry was a major target within the major targets, accounting for 75% of the net selling volume in the information technology sector, followed by communication equipment and technology hardware. In contrast, semiconductors and semiconductor equipment, as well as IT services, saw the most net buying in the sub-sectors. Goldman's data shows that the total net exposure (as a percentage of total U.S. market cap) and long-short ratio of the software industry are currently at 2.6% and 1.3 respectively, both at historic lows. JPMorgan's position intelligence team pointed out that the recent stock declines and factor volatility have dragged down hedge fund returns, with all global strategies averaging a 1.8% decline over the month, with long/short equity strategies falling by 2.0%, multi-strategy funds declining by 2% to 2.5%, and quantitative strategies falling by 1% on a market-neutral basis. Critical buying signal on Thursday The turning point in market sentiment came on Thursday. Goldman's ETF trading team observed that institutional investors began buying the IGV on Wednesday and Thursday. The fund's shares increased by 12% on Wednesday, the largest single-day change since 2023. Goldman traders believe this "feels like direct buyers trying to find the bottom and participants possibly unwinding the climax of their short positions". While JPMorgan's position intelligence team remains cautious about the market, noting that hedge fund leverage remains high and the North American market has only de-leveraged by a negative 1.1 standard deviations over the past four weeks, Goldman's trading team explicitly stated on Thursday that the software sector has reached its bottom. Short covering frenzy on Friday Friday's market validated Goldman's judgment, with not only software stocks rebounding significantly, but also momentum stocks, Bitcoin, silver, and other high beta assets that had suffered heavy losses all experiencing strong gains. Goldman's most shorted stock basket surged by 8.8% on Friday, the second largest single-day increase since 2022. This short covering frenzy affected the most hard-hit sectors in the market. However, Goldman warned that Friday's short covering only absorbed about 20% of the recent short positions. This means that unless shorts double down on their bearish positions, Monday could see a larger rebound, not limited to the sectors with the biggest declines, but possibly spreading to other areas as well. This article was reproduced from "Wall Street News"; GMTEight editor: Chen Siyu.