Markets Enter the Chop Zone as Seasonality and Positioning Collide

If this tape feels harder to trade, that’s because it is. Liquidity has thinned, systematic flows are turning from tailwinds into crosscurrents, and volatility dynamics suggest price swings are likely to get bigger before they get calmer. Welcome to late February — historically one of the trickier stretches of the quarter.

The recent shift in market tone isn’t about a single headline. It’s structural. Goldman Sachs’ flow data show that systematic strategies remain elevated, but cracks are forming. Global CTAs, which were sitting near the 90th percentile of positioning on a five-year lookback, have already begun trimming exposure. They’ve sold billions in U.S. equities year to date, and with risk parity and vol control funds still sitting in the 70th–80th percentile range, there’s room for further mechanical selling if volatility persists.

That’s where liquidity becomes critical. Top-of-book S&P liquidity has deteriorated sharply from its year-to-date average, meaning the market’s ability to absorb large flows has weakened. When liquidity thins and systematic funds are active, the result is not a gentle drift lower — it’s exaggerated intraday swings. Add to that the recent flip in dealer positioning from long gamma to flat or slightly short gamma, and the setup becomes even more unstable. In a long gamma environment, dealers dampen volatility. In a short gamma backdrop, they amplify it. Rallies can extend further than expected, and selloffs can accelerate quickly.

In other words, this is not a trend market — it’s a reflexive one.

Breadth data reinforce the message. More stocks are participating in down days, and thematic rotations have widened dispersion across sectors. While these readings are not yet flashing structural breakdown signals, they do point to a market in transition rather than one building steady momentum. Hedge fund positioning has “cleaned up” somewhat as leverage moderates, but that doesn’t mean stability has returned. It simply means excess has been reduced. The road ahead remains uneven.

Seasonality adds another layer of caution. Historically, the period from mid-February through early-to-mid March is one of the softer stretches for both the S&P 500 and the Nasdaq 100. January benefits from fresh inflows — retirement contributions, performance chasing, and systematic rebalancing. February, by contrast, often sees those supportive flows fade. Goldman’s historical analysis shows average negative returns for the Nasdaq from mid-February into March, with volatility tending to rise mid-month before subsiding.

This seasonal softness doesn’t guarantee downside, but it does skew the odds toward choppier, more fragile trading conditions. Relief rallies are common, but they tend to be sharp and tactical rather than durable.

Retail behavior is also shifting. After a year of aggressive dip-buying, recent net imbalances show more selective engagement. Crypto and crypto-linked equities — some of retail’s favorite vehicles — have experienced sharp drawdowns, and while retail remains active, the automatic “buy everything down 3%” impulse appears less forceful. That subtle change matters at the margin in a liquidity-sensitive tape.

Volatility markets offer perhaps the clearest clue about where sentiment stands. Front-end S&P skew has surged as investors roll and monetize hedges. The Goldman Sachs Panic Index, which incorporates 1-month implied volatility, VIX levels, skew, and term structure slope, recently printed 9.22 — a reading that suggests investors are approaching, but not yet fully embracing, peak fear.

And that distinction is important.

Goldman’s flow framework implies they are not yet ready to step in aggressively. Instead, they appear to be waiting for a more definitive risk premium reset — likely characterized by an event-driven VIX spike and broader positioning capitulation. In other words, they’re waiting for a moment when fear is less theoretical and more forced.

Historically, durable relief rallies tend to begin not when volatility is rising, but shortly after it peaks. A sharp spike in the VIX, combined with positioning washouts from systematic sellers and cleaner hedge fund exposure, often creates the conditions for a sustained rebound. Until then, rallies may be sold, and dips may not attract the same eager buyers seen earlier in the cycle.

None of this suggests a structural bear market is underway. Economic fundamentals remain relatively stable, and disinflation signals — particularly from housing — continue to build in the background. But from a tactical standpoint, the environment favors discipline over aggression.

In short, markets have entered a volatility pocket shaped by weaker seasonality, thinning liquidity, and systematic positioning adjustments. Goldman appears patient, waiting for a fuller volatility flush before deploying capital more confidently.

Until that moment arrives, traders should expect chop — and plenty of it.