Scott Rubner, Managing Director and Tactical Specialist at Goldman Sachs Global Markets, indicated in a report released on Monday that despite some downside risks in the current market, the U.S. stock market is expected to continue rising over the next four weeks. He noted that the threshold for a market downturn is currently high, making it difficult to maintain a bearish stance during the Labor Day period.
The so-called "pain trade" refers to situations where the market suddenly causes adverse effects for most investors, such as when a popular asset or investment strategy experiences an unexpected reversal, catching most investors off guard. Rubner had accurately predicted a market pullback at the end of the summer and suggested reducing exposure to U.S. stocks after July 4th. However, he has now turned tactically bullish, believing that the current market positioning and fund flows will provide further support for the stock market, as sellers are nearly out of "ammunition."
He pointed out that funds from trend-following systematic funds could become a significant force in driving the stock market higher. These funds have previously reduced their total long exposure from $450 billion in July to the current $250 billion, and they are now beginning to re-leverage. With liquidity decreasing in August, these fund inflows will have a greater impact on the market.
For investors, this means better chances to judge market direction. The sudden market drop at the beginning of August attracted many bottom-fishers, providing momentum for the biggest buying opportunity of the year. Rubner believes that this risk appetite momentum could continue, with the S&P 500 expected to rebound to 6,000 points by the end of the year, about 8% higher than last Friday's closing price, after the volatility period following the November presidential election.
Rubner also mentioned that Commodity Trading Advisor (CTA) funds will conduct what is known as a "green sweep," where they will continue to buy stocks regardless of market trends. With the Chicago Board Options Exchange Volatility Index (VIX) experiencing the largest nine-day drop in historical volatility, volatility control funds are expected to operate contrarily and increase their equity exposure.
Additionally, trader behavior is also supporting the market. Over the past three weeks, traders have engaged in massive gamma trading, shifting from long positions to short positions and back to long positions, with swings as high as $16 billion. Rubner noted that such large fluctuations are unprecedented in his dataset.
Corporate buybacks are also a significant market driver. Goldman Sachs estimates that about 50% of companies will close their corporate buyback windows by September 13th, with buybacks reaching $6.62 billion per day. The total authorization for corporate buybacks in 2024 is expected to reach $1.15 trillion, with an actual execution amount of $960 billion.
Rubner also anticipates that more funds will flow into the stock market as money market yields decline. Currently, U.S. money markets manage assets of about $7.3 trillion, and he believes these funds might gradually flow into other markets after the U.S. election.
However, he also warned that the market might face more downside risks after September 16th. Historical data shows that the second half of September is usually the worst two-week trading period of the year.
After the S&P 500 recorded its best weekly performance of the year last Friday, the U.S. stock market extended its gains on Monday. The market is now turning its attention to the upcoming Federal Reserve Jackson Hole meeting for clues on future rate cuts and the upcoming retailer earnings reports to assess the health of U.S. consumers.
