Goldman sees gains ahead as "pain trade" shoots higher for equities

Momentum traders and a surge in corporate buybacks promise to drive a US stocks rally over the next four weeks, according to Goldman Sachs Group Inc.’s trading desk.

“The pain trade for equities is higher and the bar for being bearish at the beach into a Labor Day barbecue party is high,” Scott Rubner, managing director for global markets and tactical specialist at the bank, wrote in a Monday note.

Rubner, who correctly predicted a late summer correction and advised in late June to trim exposure in US stocks after July 4, has turned tactically bullish saying current positioning and flows “will act as a tailwind as sellers are out of ammo.”

Gains in stocks can be fueled by flows from the so-called trend-following systematic funds. Such funds are back to releveraging after cutting their total long exposure from $450 billion in July to $250 billion currently. That flow of funds demand will have a larger impact when adjusted for August’s lower liquidity.

This is good news for investors trying to figure out the stock market’s direction after an abrupt selloff in early August attracted dip buyers, fueling the biggest buying opportunity this year. But Rubner says risk-on momentum won’t stop there: after a volatile stretch leading to the November presidential election, the S&P 500 Index may rally to 6,000 toward year-end — roughly an 8% gain from Friday’s close.

Rubner sees a so-called “green sweep” from commodity trading advisers, or CTAs, with funds likely to be buying stocks no matter which direction the market goes. And volatility-control funds — which position themselves in opposition to realized volatility — are expected to boost their exposure after the Cboe Volatility Index posted its biggest nine-day volatility decline in history.  

On top of that, traders are long gamma again, meaning they are essentially going against the prevailing trend and buying stocks as they fall and selling as they rise. That should act as a market buffer with dip buyers emerging in case of any selloff. Dealer gamma changed by $16 billion over the past three weeks going from long to short to long again. “That’s the largest change in our dataset,” Rubner wrote. 

Corporate demand will also act as a tailwind. Goldman estimates $6.62 billion of daily purchasing power until the corporate blackout window closes for some 50% of firms on Sept. 13. In total, the bank estimates corporate buybacks total $1.15 trillion worth of authorizations and $960 billion worth of executions in 2024. 

He also expects more cash from the money market to be deployed in equities. Current US money market assets under management are about $7.3 trillion, he noted. “Money market yields are starting to materially decline, this mountain will start to get deployed elsewhere after the US election.” 

However, there could be more dips ahead. Rubner warned that after Sept. 16, the stock market could once again turn negative. The second half of September has historically been the worst two-week trading period of the year and “I will not stick around for this,” he wrote. 

Stocks posted small moves Monday after a risk-on rally saw the S&P 500 notch its best week this year on Friday. Traders are now turning their attention to the Federal Reserve’s annual gathering in Jackson Hole for potential clues on interest-rate cuts and earnings form Target Corp. and TJX Cos that could provide more signs on the health of American consumers.