While the market has undergone a degree of de-risking, it remains far from a genuine "capitulation" phase—indicating that downward pressure has not yet been exhausted and volatility may persist. Lee Coppersmith, Managing Director at Goldman Sachs, cautioned in a recent report that U.S. equities are displaying increasing signs of fragility. The S&P 500 recently fell below its 200-day moving average, currently hovering around the 6,500-point level. The market has entered a negative Gamma environment, where options flows are amplifying the impact of both buying and selling activity, significantly widening the potential range of price fluctuations. Against this backdrop, Coppersmith noted that AI-related stocks and the "Magnificent Seven" remain among the few areas where positioning is still near historical peaks. Should investors need to raise additional cash or further reduce risk exposure, the AI complex could become one of the last and largest potential sources of selling.

**Oversold? Data Doesn't Support It** "Is the market oversold?" is one of the most frequently asked questions currently, and the data does not provide comforting answers. Breadth indicators show that only about 14% of S&P 500 constituents have reached oversold levels, compared to figures exceeding 50% in April 2025 and over 40% in the third quarter of 2022. While tactical rebounds are possible, the overall market structure does not yet exhibit the characteristics of a capitulation-style bottom. The Goldman Sachs Sentiment Indicator has declined from +1.40 in early January to its current reading of -0.32. Although this represents a meaningful reset, it remains far from the levels typically associated with historic market lows. Historical precedents from 2009, 2011, late 2018, 2022, and April 2025 suggest that sustained bottoms usually form near readings of -2 standard deviations or lower. The current reading implies investors are no longer aggressively long but have not yet shifted to an underweight stance—the de-risking process has begun but is far from complete.

**Systematic Funds Have Moved, But Risks Remain** At the systematic fund level, adjustments are already underway. Commodity Trading Advisors have flipped to net short positions in U.S. markets, suggesting that initial mechanical selling may be largely complete. However, should the market enter a more sustained downtrend, CTAs still have room to increase their short exposure further. Meanwhile, volatility control funds and risk parity funds have not yet significantly reduced their exposures. Coppersmith estimates that if volatility continues to climb or macroeconomic shocks persist, these two fund types could represent additional potential sources of selling pressure. In volatility markets, the dynamic has shifted. VIX positioning has transitioned from net short to net long, with sustained buying observed this week—indicating a market shift from "under-hedged" to "actively purchasing protection." Concurrently, data from Goldman Sachs Prime Brokerage shows short interest at a five-year high, though concentrated in macro products and index levels, with short covering in individual stocks remaining limited.

**Cyclicals Face Continued Selling, AI Holdings Remain Resilient** From a sector flow perspective, cyclical stocks have faced sustained pressure. Hedge funds have been net sellers in non-consumer cyclical sectors—including energy, materials, industrials, financials, and real estate—for nine consecutive weeks. The selling pace has notably accelerated since late February, nearly completely reversing the cumulative net buying seen earlier. The long/short ratio for these sectors has fallen to 1.68, below the January peak of 1.89 and marking the lowest level since May 2025. In stark contrast, net exposures to AI-related stocks and the Magnificent Seven remain near their respective historical highs. Net exposure to the U.S. software sector, which hit a record low in late February, has actually increased in recent weeks, primarily driven by short covering—although short positions in the sector remain elevated year-to-date.

**AI Complex: The Next "Last Fortress" to Unwind** Synthesizing these signals, Coppersmith concludes that a de-risking phase has occurred, and the market's next move depends on what investors choose to sell. With most sectors having already experienced systematic reductions, the AI complex stands as the current "last fortress" where both positioning size and unrealized gains are most concentrated. If the market requires further fundraising or risk reduction, the AI sector represents the most logical source of selling. Goldman Sachs' conclusion is that cyclical stocks are becoming increasingly attractive when news flow improves, while the AI sector, at this stage, appears more like a "liquidation option" for hedging or fundraising purposes.