Goldman strategist says stock rally is now 'out of gas'

Goldman strategist says stock rally is now 'out of gas'
Scott Rubner says that investors should add portfolio hedges.
DEC 05, 2023

Brace for a pullback in stocks as the propellants powering last month’s rally are disappearing fast, according to a Goldman Sachs Group Inc. tactical specialist who tipped the November surge in markets.

After the S&P 500 raced to its second-best November in 40 years, the dynamics that caused “the everything rally” last month “have absolutely run out of gas right now,” Goldman’s Scott Rubner wrote in a note to clients, citing the flow of funds and the positioning of systematic investors. 

The euphoria in stocks was largely driven by a sea change in expectations around Federal Reserve policy moves, with traders wagering on a 70% chance of a rate cut in the first quarter. Rubner noted this caused a rush toward equities by commodity trading advisers, or CTAs, who surf the momentum in asset prices and take long and short positions in futures markets. 

“This is the fastest increase in exposure that we have ever seen,” he wrote, highlighting the $225 billion in buying during the past month. “CTA asymmetric skew is firmly to the down side,” as the funds would only buy $58 billion in an upward move, while in the case of a downward swing $210 billion could be offloaded, said Rubner, a managing director at the bank.

In early November, Rubner rightly called for a strong year-end rally and said “the pain trade is to the upside.”

In this week’s note, he said that investors flocking to stocks included volatility control funds, which increased their exposure to the 95 percentile of levels seen over the past five years, while passive global equities have attracted more than $48 billion of inflows. 

And while there are “no longer any bears left,” Rubner suggested that it “makes sense” to add portfolio hedges with the S&P 500 Index near 4,600 points.

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