Goldman Sachs’ trading desk expects record stock market highs in the next four weeks, followed by a downturn.
A low volatility environment and corporate buybacks are driving Goldman’s bullish outlook until mid-September.
“We just witnessed one of the largest and fastest unwinds that I have EVER seen,” Goldman’s Scott Rubner wrote.
Investors should prepare for fresh record highs in the stock market over the next four weeks, but then get ready to bail.
That’s according to a Monday note from Goldman Sachs’ trading desk, led by managing director Scott Rubner.
According to Rubner, the stock market is entering “a very positive 4-week equity trading window” that suggests the “pain trade for equities is higher.”
“Global two-week vacations started on Friday at 4pm. The bar for being bearish at the beach into a Labor Day BBQ party is high,” Rubner said, highlighting that low volatility markets that are so common during the end of summer weeks are typically bullish for stock prices.
That new low volatility environment in the stock market comes after a historic decline in the CBOE Volatility Index at 62%, representing the biggest 9-day drop in Wall Street’s fear gauge on record.
“We just witnessed one of the largest and fastest unwinds that I have EVER seen,” Rubner said, suggesting that professional trend followers who were shaken out of stocks during the early-August sell-off are now likely to flip back into buy mode.
Other buyers of stocks over the next few weeks include companies that have authorized share buyback programs.
According to Rubner, with a corporate blackout window starting on September 13 for about 50% of companies, there will be a lot of stock buying between now and then.
“The August to September corporate repurchase window is historically strong. This two-month period is the second best of the year with 20.7% of executions,” Rubner said, adding that the bank estimates about $1 trillion in stock buybacks being executed this year.
With the S&P 500 less than 1.4% below its record high, it won’t take much for the index to hit record highs in the short-term.
When to sell stocks
But while Rubner is bullish, he still expects a volatile stock market and isn’t so sure about more gains after September 16.
“I am bullish until September 16. This is when seasonals change. 2H of September is the WORST TWO WEEK TRADING period of the year. I will not stick around for this,” Rubner said.
The call from Rubner is significant given that he gave a spot-on stock market prediction in early July, when he said stocks were poised to surge in the first two weeks of July before entering a period of volatility in the second half of the month, which is exactly what happened.
“Late 2H September will be a tricky trading environment (especially pre-election),” Rubner said.
When to buy back in
While Rubner expects a surge in stocks over the next four weeks, followed by a period of negative volatility in the second-half of September, he still expects the stock market to end the year at record highs.
“SPX $6K – new highs in Q4, led by November and December months,” Rubner said, adding that a record $7.3 trillion in US money market funds will flow into stocks and bonds after the US election in early November.
A rise to 6,000 for the S&P 500 represents a potential upside of 7% from current levels.
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