Goldman Sachs' prime brokerage advised clients that the recent rebound in software and IT services stocks could persist, issuing the assessment in a client note on Wednesday that was circulated on Thursday. The guidance comes amid unusually high short interest in the sector.
The S&P 500 software and services index <.SPLRCIS> has declined by over 18% so far this year, trimming more than $1.2 trillion from its collective market value, according to LSEG data. Despite that steep year-to-date fall, stocks within the index recovered during the most recent trading sessions and the index climbed by more than 4% this week.
Short positions - bets that a security's price will fall - are concentrated in software and IT services. On February 24, those two sectors were the top two most-shorted U.S. industries on Goldman Sachs' prime brokerage trading desk. Prime brokerage records show that short exposure has risen to the highest level on record for Goldman, which began tracking these positions in 2016. At the same time, long positions on the sector - wagers that stocks will rise - stand at a record low.
The combination of a marked year-to-date decline in valuation, a recent multi-session recovery and elevated short interest frames the market dynamic Goldman outlined for clients. The prime brokerage view highlights a market where downside bets are abundant while direct long exposure is limited, even as the index staged a substantive short-term rebound.
Market participants monitoring these indicators face a tension between the depth of the sector's YTD losses and the mechanical risks that heavy short interest can introduce during rebounds. The prime brokerage note points to the possibility that the recent uptick in prices could extend, but it also documents the extreme positioning that market participants currently hold.
Context and positioning
Goldman Sachs' prime brokerage data indicates two notable positioning facts: short positions on software and IT services are at record highs for the firm, and long positions in the sector are at record lows. These measures are based on Goldman’s tracking since 2016.
For investors, the recent bounce in a sector that has already given back substantial market value presents both a potential opportunity and a reminder of concentrated bets on both sides of the market.