The recent market surge, often deemed improbable by many experts, has been primarily fueled by significant buying activity. Trend-following algorithms (CTAs) have been on an historic buying spree, with Goldman Sachs noting a purchase of nearly $70 billion in US equities within ten days – the largest such buying spree recorded by Goldman.
Adding to this surge were record stock buybacks over two weeks, set to conclude on December 8 as the next blackout period approaches. Additionally, there has been a notable influx of retail investors chasing momentum, resulting in the largest two-week inflow since February 2022, with $40.0 billion flowing in.
However, caution is advised as several indicators hint at the imminent end of this rally. Goldman's trader Mike Washington warned of a potential slowdown in flow dynamics, indicating that CTAs may start losing steam. Similar warnings were echoed by BofA's CIO Michael Hartnett, suggesting a shift in sentiment from selling panic to year-end greed.
Moreover, hedge funds, which were heavily short in November, are now facing significant losses and are poised to turn net long, potentially signaling an upcoming market decline.
Several factors indicate the limitations of further market growth. The leading Megatech group, particularly the top companies, appears to have reached its peak, with approximately 99% of hedge funds already holding net exposure to these major names, implying limited buying potential.
Further reinforcing the notion of a market slowdown, Goldman's flow guru, Scott Rubner, reversed his earlier bullish stance, suggesting a market shift. He forecasts a decline in peak flow-of-fund demand for 2023, signaling an end to the upside momentum and potentially heralding a downside market movement in December.
Here are points from Rubner's analysis:
- CTAs Turning Long: CTAs have shifted from short to long positions in US equities, purchasing $33 billion worth, following a month with the largest buying in Goldman's data set.
- Bonds Shortened but Demand Reduced: Global Fixed Income CTAs have reduced their short bond positions by approximately 45%, suggesting a smaller short bond position but with significant demand needed for upside.
- Macro Futures Positioning Flipped: Other equity macro positioning has moved from short to long in US macro futures, witnessing a substantial flip.
- Gross Leverage at 5-Year High: Overall book gross leverage reached a five-year high, indicating increased market exposure.
- Inflows and Sentiment Improvement: Passive equity inflows surged over two weeks, and sentiment indicators indicate a stretched market sentiment.
- Corporate Demand Tapering: Corporate demand is expected to decline as the market approaches a blackout period on December 8.
- Improved Liquidity: Enhanced liquidity levels suggest improved risk transfer capability.
- Gamma Wall Impact: The index's "Gamma Wall" is expected to limit significant market movements, potentially capping both upside and downside.
- Pension Fund Rebalancing: December brings significant pension fund rebalancing, potentially impacting equity markets.
- Retail Year-End Considerations: Retail tax-related selling and prepayments may occur towards the year-end, impacting market dynamics.
Rubner's conclusion highlights that the market has experienced an unprecedented surge but warns of a probable slowdown. He suggests more ups and downs, signaling a fairer fight between buyers and sellers, with the market dynamics favoring long positions but no longer providing a tailwind. This shift in positioning prompts the consideration of trading strategies amid potential volatility.
Overall, the bottom line from this recent analysis indicates that the market has experienced an extraordinary surge but is now facing indications of a slowdown, potentially paving the way for a more volatile and balanced market landscape in the near future.