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Goldman Sachs’ trading division expects the stock market to hit record highs in the next four weeks, followed by a decline.
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A low-volatility environment and share buybacks keep Goldman optimistic through mid-September.
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“We just saw one of the largest and fastest dismantlings I have EVER seen,” wrote Goldman’s Scott Rubner.
Investors should prepare for new record highs in the stock market over the next four weeks, but should also be prepared to exit afterward.
This is evident from a note dated Monday from the trading department of Goldman Sachs, led by managing director Scott Rubner.
According to Rubner, the stock market is entering “a very positive four-week equity trading window,” indicating that “the pain threshold for equities is higher.”
“Global two-week vacations started at 4 p.m. Friday. The bar for being bearish at the beach and a Labor Day BBQ party is high,” said Rubner, who stressed that the low-volatility markets that are so common at the end of the summer weeks are typically bullish for stock prices.
This new low-volatility environment for the stock market follows a historic 62% drop in the CBOE Volatility Index, the biggest nine-day drop in Wall Street’s fear indicator ever recorded.
“We just saw one of the biggest and fastest declines I have EVER seen,” Rubner said, suggesting that professional trend followers who lost stocks during the early August sell-off are likely now returning to buying behavior.
Other stock buyers in the coming weeks will be companies that have approved share buyback programs.
According to Rubner, starting September 13, about 50% of companies will be in a period of business shutdown. In the meantime, there will be a lot of stock buying.
“The August-September corporate buyback 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 will be executed this year.
With the S&P 500 now less than 1.4% off its record high, it won’t be long before the index reaches record highs in the near term.
When to sell shares
While Rubner is optimistic, he still expects a volatile stock market and is not so sure about further gains after September 16.
“I’m optimistic until September 16th. That’s when the seasons change. The second half of September is the WORST TWO WEEK TRADING PERIOD of the year. I’m not hanging around for this,” Rubner said.
Rubner’s call is significant because he made a telling prediction about the stock market in early July. He said that stock prices would rise in the first two weeks of July, only to enter a period of volatility in the second half of the month. That’s exactly what happened.
“Late September 2nd will be a tough trading environment (especially before the election),” Rubner said.
When should you shop again?
Rubner expects stock prices to rise over the next four weeks, followed by a period of negative volatility in the second half of September. However, he still expects the stock market to close the year at record highs.
“SPX $6K – new highs in Q4, with November and December leading the way,” Rubner said, adding that a record $7.3 trillion in U.S. money market funds will flow into stocks and bonds after the U.S. election in early November.
A rise to 6,000 for the S&P 500 represents a potential upside of 7% from current levels.
Read the original article on Business Insider
