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Goldman Sachs’ trading desk expects record highs in the stock markets in the next four weeks, followed by a downturn.
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An environment of low volatility and corporate buybacks are driving Goldman’s bullish outlook through mid-September.
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“We just witnessed one of the largest and fastest discharges I have ever seen,” Goldman’s Scott Rubner wrote.
Investors should prepare for new all-time highs in the stock market over the next four weeks, but then prepare for a bailout.
This is evident from a letter dated Monday Goldman Sachs trading desk, led by Managing Director Scott Rubner.
According to Rubner, the stock market is entering a “very positive four-week stock trading period,” indicating that “pain trading in stocks is higher.”
“Two-week global vacations started Friday at 4 p.m. The bar for being bearish on the beach at a Labor Day BBQ party is high,” Rubner said, emphasizing that low-volatility markets so common to the end of the summer weeks, usually bullish for stock prices.
That new low-volatility environment in the stock market will come next a historic 62% drop in the CBOE Volatility Index, This represents the biggest nine-day drop in Wall Street’s fear gauge ever.
“We just witnessed one of the biggest and fastest dislocations 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 be back in buying mode return.
Other share buyers in the coming weeks include companies that have authorized share repurchase programs.
According to Rubner, with a corporate blackout period starting on September 13 for about 50% of companies, there will be a lot of stock buying between now and then.
“The August through September period for corporate bond buybacks 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 will be conducted this year.
With the S&P500 less than 1.4% below record levels, it won’t take much for the index to reach record highs any time soon.
When to sell stocks
But while Rubner is optimistic, he still expects a volatile stock market and isn’t so sure about further gains after September 16.
“I’m bullish through September 16th. This is when the seasons change. The second half of September is the WORST TWO-WEEK TRADING period of the year. I’m not dwelling on this,” Rubner said.
Rubner’s call is significant in that regard he gave an accurate stock market forecast in early July, when he said stocks would start to rise in the first two weeks of July before entering a period of volatility in the second half of the month, that’s exactly what happened.
“The end of mid-September will be a difficult trading environment (especially in the run-up to the elections),” Rubner said.
When to buy again
Although Rubner expects a rise in stock prices 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,” Rubner said, adding a record $7.3 trillion in US money market funds will flow into equities and bonds after the US elections in early November.
A rise to 6,000 for the S&P 500 represents a potential increase of 7% from current levels.
Read the original article Business insider