Goldman Sachs fund flow analysts Gail Hafif, Brian Garrett, and Lee Coppersmith noted that U.S. stocks have risen more than 3% this month, and they believe this trend is likely to continue. While the technical indicators don't yet signal a full-fledged "go-all-in" move, they still support further gains from current levels.
Potential resistance includes:
- Seasonal weakness
- Pension fund sales at the end of the month
- Companies have entered a blackout period for share buybacks (expected to resume before the end of the year).
- Systemic cash flow may turn negative
However, due to the extremely low volatility during the summer, investors have already deployed a large number of protective short positions, and in this environment, "short-term pain point trading" continues to rise.
1. Mutual Fund Flows
Over the past 40 years, the Federal Reserve has cut interest rates eight times after maintaining them for more than six months. If this rate cut is not accompanied by a recession (the current market consensus), then median equity fund inflows would increase by 6% over the next 12 months, supporting a moderate market rise. In this non-recessionary baseline scenario, the S&P 500's median return is +8% over six months and +15% over 12 months.
2. Investor sentiment
The latest AAII (American Association of Individual Investors) long-short ratio reading is 0.98, below the 5-year average but above the 1-year average, and significantly higher than the 0.35 on May 1st of this year. With the start of the Federal Reserve's interest rate cut cycle and the end of earnings season, improved sentiment has provided support for institutional investors to increase their holdings of US stocks.
3. Goldman Sachs Sentiment Index
Goldman Sachs' sentiment indicator shows that the current US stock investor positioning index is -0.3, far below the overcrowded level of nearly +2 at the beginning of the year. This indicates that although the market has reached new highs, it has not reached an extremely crowded position and still has room for further upside.
4. Asset Manager's Position
CFTC data shows that asset managers’ net positions have deviated by more than one standard deviation from last year, but total positions have not yet recovered to the high levels seen after the election, indicating that there is still room for improvement.
5. Hedge Fund Positions
Hedge funds' total leverage ratio surged 6.6 percentage points to 287.5% (78th percentile over the past year), while net leverage rose 1.6 percentage points to 77.5% (56th percentile over the past year). Goldman Sachs believes that a significant increase in net leverage is needed to signal the start of a new market rally. Until then, there is still "tank room" to support a moderate rise in the stock market.
From the perspective of cash flow:
- Global equities have seen net buying for two consecutive weeks.
- North America and developed Asia saw net buying, while Europe and emerging Asia saw net selling.
- At the industry level, individual stock buying and replenishment of macroeconomic products accounted for 77% and 23% respectively.
6. Fund cash flow
Global equity funds continued to see strong inflows, particularly US equity funds, with a net inflow of $68 billion in the week (compared to a net outflow of $10 billion the previous week). US equities now account for 68% of total assets, slightly below the 70% peak expected in 2024. Overseas investors continue to buy US stocks, albeit at a slower pace.
7. The Chinese Market
This year, funds have seen significant inflows into China and emerging market funds. In terms of sectors, industrials, financials, and telecommunications have seen the largest inflows, while consumer and technology sectors have experienced outflows. Overall, demand in emerging markets (excluding China) has also increased significantly, and this trend is expected to continue.
8. Retail Investor Power
Retail buying remained strong, closely mirroring the S&P 500's performance. Year-to-date (YTD) data suggests that retail investors continue to be a tailwind rather than a drag on the market's upward movement.
9. Gamma (Option Position Structure)
Although some Gamma is lost after options expire, traders still hold a significant amount of positive Gamma, which is more pronounced during market downturns and helps stabilize the market. Therefore, this structure remains a market driver until the end of the month.
10. Liquidity
S&P market liquidity was $20.42 million, 60% higher than the two-year average and far above the year's low of $1.11 million, indicating a healthy market trading environment.
11. Pension funds sell off at the end of the month.
Risks remain: US pension funds are expected to sell $22 billion in US stocks by the end of the month. This figure is at the 89th percentile of sales over the past three years, and at the 92nd percentile since 2000.
in conclusion
Although there is technical pressure such as end-of-month selling pressure, institutional positions are not crowded, fund flows remain positive, retail buying has not decreased, and sentiment indicators are at a moderate level. Therefore, the market's "pain point trading" will continue to rise in the short term.
