Friday Was Just The Start: Here Are Goldman's 5 Reasons Why The Selling Will Continue

Tyler Durden's picture

After 40+ days of the S&P going virtually nowhere on muted volume, cross-asset correlations soaring to all time highs, and quant funds leveraging to record levels, it all just snapped on Friday the "volatility on the sidelines" finally made a grand entrance right back into the market, which tumbled the most since Brexit, and closed below its 2015 highs.

And now the question is whether this violent selloff, the fouth such elevator drop lower in the past two years, is over or if it will continue. While there have been several conflicting viewpoints, here we present the opinion of Goldman's David Kostin, according to whom the selling is only just starting.

To be sure, not even Goldman is willing to go out on a limb as warning a crash is imminent, which is why it prefaces its forecast by saying that "strategically, we expect modest appreciation in the US equity market during the next several years. The domestic economy is growing, albeit at a muted pace of just 1.5% in 2016 and 2% in 2017. Sales and earnings for most firms will increase although margin expansion will be limited. Rising profits should support higher share prices even as P/E multiples contract."

However, it then just as quickly notes that "tactically, there are five reasons the S&P 500 will fall by year-end 2016."

So, without further ado, here are Goldman's five reasons why the market will continue falling from here.

  • First, our Sentiment Indicator shows an extreme bullish reading of 95, which suggests the S&P 500 index will fall by 2% during the next month. For context, on June 28 our Sentiment Indicator showed maximum bearishness with a reading of 0 which implied the market would rise by 4% during the following month. During the nine weeks of 3Q our Sentiment Indicator has climbed from 0 to 100 and the index has appreciated by 4%. Readings above 90 and below 10 are statistically significant trading signals.
  • Second, we anticipate a rise in political uncertainty, which will translate into a lower P/E multiple. The first of three scheduled Presidential debates will occur on September 26 followed by debates on October 9 and October 19. Although prediction markets assign a roughly 70% probability that Hillary Clinton will capture the White House, the polls have recently tightened and equity uncertainty typically rises ahead of an election (see Exhibit 2).
  • Third, recent US economic data has been disappointing. The labor report, retail sales, and both the ISM manufacturing and non-manufacturing surveys were below consensus expectations. The US MAP score  of economic surprises is now negative for the first time in two months. The Goldman Sachs Current Activity Indicator (CAI), a real-time measure of the pace of domestic economic growth, is now just 0.9%.
  • Fourth, the weak macro data means downside risk to EPS forecasts. Consensus bottom-up adjusted EPS estimates for 2016 equal $118 but have been unchanged for three consecutive years – the epitome of “fat and flat.”  Negative EPS revisions have equaled 0.5% during the past three months (-0.2% excluding Energy). Looking forward, the bottom-up consensus expectation of 7% year/year S&P 500 EPS growth in 4Q seems aggressive given it assumes Financials EPS surges by 14%. A patient Fed with rates on hold represents a headwind for the sector where ROE is now below 10%.
  • Fifth, equity valuation remains extended. The S&P 500 index trades at the 84th percentile of historical valuation while the median stock is at the 98th.

* * *

It goes without saying that if there was anything that would unelash a major algo-driven buying scramble on Monday - aside from the now usual central bank intervention - it is 5 reasons from Goldman why stocks will continue plunging.

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Jack Burtan's picture

It will be green by middle of next week most likely.

Boomberg's picture

It will be green by middle of next Monday likely..fixed it.

Jack Burtan's picture

Probably right. the fix in most likely allready in.

bleu's picture

Did SATAN escape from the abyss and took up residence at Goldman?

GUS100CORRINA's picture

SATAN and his demons have been at Goldman, in government, in education and at the CBs for years. 

Everyone is now on same side of the boat, so it is time to inflict the maximum amount of pain to the most people who now view their portfolios as gods!!!!

SATAN is jealous of portfolio worship!!!! By the way, SATAN and his demons are probably the biggest holders of PUT contracts!!

Like they said on 9/11, follow the money honey and you will find the answer. it was the Arabs who had the biggest short position on airline stocks a week before the 9/11 event. 

SATAN was never in the abyss, but is amonst leaders in high places as evidenced by verse below:

[1Pe 5:8 NKJV] 8 Be sober, be vigilant; because your adversary the devil walks about like a roaring lion, seeking whom he may devour.

SATAN and his demons are getting ready to 'devour' a lot of portfolios and Friday was just the start.

HopefulCynical's picture

Squid says zig, it's time to zag.

InjectTheVenom's picture

I'd rather ...

>>>  take trading/investing advice from GS    OR

>>>  take parenting advice from Casey Anthony

knukles's picture

6.)  Janet doesn't know whether to shit or go blind? 

Butter-Cup's picture
Butter-Cup (not verified) Jack Burtan Sep 11, 2016 1:03 AM

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do...

Trip Fontane's picture

It's a 'bullish retracement". New highs after Fed announces no rate hike. I can't see how they would take any direct measure to impact the markets and put Hilary in favor.

Trip Fontane's picture

That's putting Trump in favor if tank markets, not Hillary.

buzzsaw99's picture

everything the squid says is a lie

SimpleJackBlack's picture
SimpleJackBlack (not verified) Sep 10, 2016 5:37 PM

Congress passed the Saudi retaliation act.

They should be dumping Treasuries Monday.

Lookout below!

sudzee's picture

Left out the only thing that really matters. The FED. 

GRDguy's picture

Did anyone else notice that the one-day chart for all three (S&P, Dow, Nasdaq) looks like the smooth slope down was a programmed algo from left to right?

Looks to me like they programmed the algos to warn the Fed not to take away the punch bowl.  We'll see.

Stormtrooper's picture

Central banks all in with no life preserver.  Their keyboards now have double Control-P keys.  Dow 25000, S&P 5000 by end of 2016.

trueFacts's picture

reason 6: the FED now must raise rates by 0.5% by Sep. 30, or risk $3 trillion of state pensions sending a $500 million bill to 49 other state legislatures, ...just like illinois last week.  

Bryan's picture

... and yet, on Monday all will be 'surprised' when the Fed injects a bunch of fiat into the system.  They're talking the market down because they want to buy at lower prices.

SimpleJackBlack's picture
SimpleJackBlack (not verified) Sep 10, 2016 6:54 PM


Albertarocks's picture

Every one of those 5 reasons have been baked solidly into the market since about 6 months after the March 9, 2009 bottom.  Those reasons have been meaningless for 7 years so why should we think they mean a damned thing now?  With $4 trillion in helicopter money about to be launched how could we possibly expect the market to continue dropping?

Unless... unless they need a scary little crash in order to justify that $4 trillion that they have already said is coming?  Because if there's one thing we know for certain, these banking demons are not going to give up their empire and the only thing they know is to print money.  All it's going to accomplish is to just extend their own demise that much longer.  And ours.

Dr. Dooms-a-lot's picture

PPT at the ready. Goooooo PPT!

Rellorellin's picture

Whaaat! Suddenly, funderrrmentals matter? EPS, ISM, wages, PMI and GDP has been in the shitter for some time now.

JailBanksters's picture

Then ot's no different to every other dip

It's happened before and it happen again.

A dip only happens because somebody pulled the plug, and the plug only gets pulled to pick up more for less


ilovetexas's picture

Goldman, oh, who cares. Snoring .....

Pareto's picture

Central Banks will never let '08 occur again - there may be a time where their efforts will prove futile - but for now, Central Banks will continue with interest rate suppression.  Whether the stock market rises (or falls) as a result is anybody's guess.  So for me, the thesis remains - continued monetary debasement essentially implies a long position in PMs - an investment in monetary shinnanigans as Grant puts it.  Speculating on the SnP - long or short - I think will find most people on the wrong side of the trade either way.  When you think it can't go any higher - it can and does.  And of course the same can be said for the opposite.

Many have said on here, that the best position is simply not to play.  Until normalcy returns - free and unfettered markets - its probably the best advice.

Its much easier sleeping at night.

wholy1's picture

The only real "selling" of consequence is Goldman "Hacks" ops in to BONDAGE!

slobbermut's picture

That last line alone: It goes without saying that if there was anything that would unelash a major algo-driven buying scramble on Monday - aside from the now usual central bank intervention - it is 5 reasons from Goldman why stocks will continue plunging, was worth the read.