(Bloomberg) -- US stocks should rally into the end of the year, but not before fighting through an unfavorable near-term setup driven by technical positioning, fund flows and pre-election anxiety, according to Scott Rubner, managing director for global markets and tactical specialist at Goldman Sachs Group Inc.
“I am tactically negative into quarter-end, but targeting the S&P 500 FOMO year-end rally,” Rubner wrote in a note to clients Friday,
With seven trading sessions remaining until the third quarter ends, risks include Friday’s options expiration and the S&P 500 Index gamma — a measure of options volatility — turning negative. The long gamma position has declined by roughly $6.1 billion in the last two days, the third-largest drop in Goldman’s dataset going back to 2019. Taken together, it means Wall Street dealers won’t be buying this dip to maintain market-neutral positioning.
In addition, selling pressure is expected to get more intense over the next month or so. October usually is when active mutual funds unload their worst performing positions to prepare for year-end, Rubner wrote. Meanwhile, pension funds are fully funded, and Goldman sees them reducing equity risks and moving into investment-grade credit.
With the election on the way, institutional investors are “reducing 1 delta and adding to directional hedges,” Rubner wrote, meaning they’re selling favored long positions and buying S&P 500 put spreads to hedge against possible losses. He also sees more selling coming from hedge funds, which still have elevated election exposure and typically reduce positions ahead of a vote. And buybacks won’t be available to soak up the supply with 55% of corporations in pre-earnings blackout windows that last until Oct. 25.
What’s more, positioning by trend-following systematic funds is bullish just for the next five trading days and then skews to the downside. If the market turns negative, Commodity Trading Advisors, or CTAs, are expected to sell $47 billion of US stocks over the next month.
So the near-term setup is for choppy trading, lower equity prices and higher volatility, Rubner wrote. One of the trades he recommends is to buy the S&P 500 Nov. 24 5% out-of-the money lookback put options, which allow the holder to exercise the derivative at the most beneficial price of the underlying asset over the life of the contract.
Things will change when the election is over, with the S&P 500 embarking on a “FOMO year-end rally” no matter who wins, according to Rubner, who sees it eventually reaching 6,000. “The market will trade like a bunch of RINO’s (Recession In Name Only) portfolios for 2025,” he wrote, noting that investors will likely chase risk in November and December and re-allocate their portfolios out of cash and into stocks.
Since 1900, the S&P 500 has posted a median return of 3.4% in November and December of election years, Goldman data shows. Once the vote is settled, Rubner sees stock market breadth improving, and he expects the reflation trade as well as value, energy and emerging markets shares to outperform.
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