Goldman Sachs: The upward trend in U.S. stocks is hard to resist, but a short-term pullback is the healthiest option.
The financial blog Zerohedge points out that since the beginning of this month, the US stock market has seen a widespread panic-buying. If this happened after a true “all-clear” event — such as last year when Trump resolved the tariff issue — it would be healthy. But if this panic-buying is only based on the assumption that “Trump’s daily statements mean some substantive policy,” then it’s quite the opposite — not only is it unhealthy, it could actually be a major "bull trap."
A Wallstreetcn article mentions that, from a technical analysis perspective, this is largely thanks to record-setting CTA buying, which provides support to the US stock market.
Current positioning remains extremely bearish, far below the overcrowded level, and this can be seen as the most bullish signal for the market because it ensures ongoing momentum chasing. The demand for buying that does not rely on subjective judgment will persist, stock buybacks are about to restart, and falling volatility will allow net exposure to rise again.
That said, Goldman Sachs trader Cullen Morgan writes, "Our rebound has been fast and fierce, and signs of chasing/overbought are beginning to appear."
A series of signals show this:
Almost record-high QQQ call option trading volume.
The market has reached overbought levels in the second-shortest period ever: measured by the 14-day Relative Strength Index (RSI), the S&P 500 surged from oversold to overbought territory in just 11 days.
Deutsche Bank writes: the speed of this rally is astonishing, as the index has risen a staggering 10.7% over the past 11 trading days. This pace even exceeds last year’s “Liberation Day” rally — which rose +10.1% in the same period. Excluding overlapping cases, such rapid gains are rare. Since 2000, such a >10% rise in the S&P 500 in 11 days has only happened 15 times, about once every two years on average.
This rally is second only to the even more rapid rebound in the summer of 1982 — when Volcker slashed rates from 13%.
What's next?
Goldman’s Morgan believes: In the near term, a pullback might be the healthiest thing for the market, but the overall upward trend appears hard to resist. He suggests replacing long positions with cheap call options on individual stocks or indices, for high cost-effectiveness. For hedging, Morgan prefers using IWM put spreads or ratio put spreads for downside protection.
Meanwhile, the Nasdaq 100 index has risen for 13 consecutive days, marking the longest winning streak since 2013. The Nasdaq has rallied 13 straight days, the longest since January 1992. Since 1983, such streaks have only happened seven times; subsequent forward returns were all quite impressive.
According to Goldman prime brokerage data, the net exposure and long-short ratio of overall prime broker books remain at low levels, at the 42nd and 3rd percentile over a 3-year lookback (whereas in early March they were at the 93rd and 14th percentile), while total leverage remains at the 97th percentile high over the past three years. The overall short exposure to macro products (indices + ETFs) is only slightly lower than the peak at the end of March.
As large-cap US tech earnings season kicks off, Goldman traders notice: hedge funds have started buying back the Mag 7 tech giants this month, but positions still remain well below the peak in early 2016.
Systematic strategies are receiving a lot of attention. US stocks have seen the largest 5-day buying in history. Goldman’s latest estimates are that CTA (net) long positions are about $16 billion (historically highest is $74 billion). Though there is still room to add — Goldman currently estimates CTA buying of $23 billion over the next five days, but that’s down significantly from $70 billion earlier this week. In other words, this pace will not be quite as aggressive going forward.
We have now rebounded to the peak Gamma region. Goldman cites third-party data showing market maker net Gamma longs of about +$9.5bn — though this number looks somewhat questionable, it’s among the highest levels in the past four years. Morgan estimates that from here, market maker Gamma will progressively decrease as prices rise, but is sticky on the downside. After April options expiry, Goldman expects positions to be cleaner, and Gamma strikes to move up via systematic excess covered calls.
Finally, Morgan notes that the volatility market has clearly loosened: Goldman’s US volatility panic index has fallen below 5/10, while just a few weeks ago it was above 9. This means implied volatility has fully pulled back, and Goldman’s derivatives team can now directly hold volatility longs in many scenarios.
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