Goldman's Shocking Capitulation: The Buy-The-Dip Era Is Dead, "This Is A Genuine Regime Change"

Earlier today, we were delighted to report that after the biggest vol explosion in history, the world's largest hedge fund Bridgewater, went from urging traders to go all in as recently as January 23, to warning that a "bigger shakeout is coming."

It turns out that Ray Dalio wasn't the only fund to urge its broader client universe - and anyone else who cared to listen - to do one thing, while telling a select group of clients to do the opposite. As we noted on Saturday, in his latest Weekly Kickstat published on Friday, Goldman's chief equity strategist David Kostin essentially told clients to BTFD, suggesting that the correction was likely almost over, based on historical patterns.

Meanwhile, on the very same Friday, Brian Levine - co-head of global equity trading at Goldman Sachs - sent out an email to the investment bank’s bigger clients, in which he made a stunning prediction: the Buy the Dip Regime is now over.

In the email, first reported by the Financial Times, Levine writes that "Historically shocks of this magnitude find their troughs in panicky selling" and yet "I’ve been amazed at how little ‘capitulation selling’ we’ve seen on the desk . . . The ‘buy on the dip’ mentality needs to be thoroughly punished before we find the bottom."

And, more shockingly, the person in charge of the most important trading desk also said that “longer term, I do believe this is a genuine regime change, one where you sell-the-rallies rather than buy-the-dips."

Brian Levine's full shocking letter is below:

Thought I'd consolidate a bunch of thoughts and themes gathered throughout the week and try to make some sense out of the 10% correction we've seen the past two weeks from a market that had gone a record period of time without even a 5% drawdown!

  • Trigger? I've heard many "write-off' this correction as being technical in nature. Well, yes, that was the trigger, but if you're hanging your hat on that, you're missing the bigger picture. The market had effectively quadrupled over the past 9 years. Why? Obviously numerous variables contribute, but it would be hard to dispute that unprecedented, globally coordinated easy monetary policy was your primary driver to force investors out on the risk curve. Sure, rates have been gradually rising the past few years, which the stock market has easily digested, but there's always a threshold that sparks a seminal change. And I don't think it was a coincidence that the S&P topped out on the very same day 10-year yields made 4-year highs (a week ago Monday the 29th)....and rates have backed up a further 15 bps to 2.8% currently. The fact that bonds couldn't rally in the equity selloff is evidence of a regime change in the multi-year equity bull market.
  • "Bulletproof Psychology" is punctured — It's generally a late-stage bull market when the greatest justification for buying equities is "there's nowhere else to put my money" and conformist performance-chasing. Hence, we've recently witnessed countless red-flashing warning signals about positional complacency — just in the past few weeks, we saw:
    • GS Risk Appetite indicator hit record highs
    • Both the Conference Board AND the University of Michigan surveys showed a record percentage of investors expected the stock market to be up this year
    • Investors Intelligence weekly survey of 130 market newsletters showed bullishness hit 32-year highs (that's over 1000 datapoints)
    • AAII Sentiment weekly survey of investors' bullishness hit 8-year highs
    • Historically, a high Sharpe return in S&P (steady rises with minimal vol) often presages a major correction, and two weeks ago the 1-month trailing Sharpe of the S&P 500 was over 6!

My response to common justifications for a rebound back:

  • "It's been a non-panicky selloff' — True, but historically shocks of this magnitude find their troughs in panicky selling. I've been amazed at how little "capitulation selling" we've seen on the desk, despite outsized market share. The "buy on the dip" mentality needs to be thoroughly punished before we find the bottom.
  • "The corporate bid will stabilize the market" — corporates make up —8% of market volume, and —2/3 of buybacks are now bought systematically via 10b5-1 programs. Historically they were far more discretionary in buying sharp declines (not that down 5-10% from all-time highs would really qualify), so although we are seeing increased volumes in corporates this week, generally they haven't matched the increase in market volume. Longer-term, I believe buybacks increase significantly over the course of the year, but don't think that's a major factor over next week or two's action.
  • "This is technical to equities — credit is hanging in" — Well, that was earlier in the week. High yield is really starting to break down vs. equities today (not to mention that HY didn't participate in the equity rally last month to begin with).
  • VIX E'TN post-mortem — Well, it worked as structured.....obviously a +100% daily move drives a short fund to zero — was unfortunate how many didn't seem to understand that risk (as $3B+ of assets virtually disappeared on Monday)......but it also serves as a cautionary anecdote for market tops. Any short or levered product can go to zero in a day. Ironically, the strategy of selling vol can ALSO work for a long period of time until it knocks you out.....both ultimately proved true. In regards to the stock market, the vol-selling strategy has provided quite a bid to the equity market in recent years —remains to be seen what happens to this trend, but I would expect VIX to ultimately settle back closer to its historical range in the high teens.
  • Systematic Flows: per our resident expert Paul Leyzerovich (who has nailed this, btw), the supply baton is currently being passed from Vol-control funds to Risk Parity, and CTA supply has been heavier in EMEA and moving to the US. Overall, he believes we are in the "sweet spot" of supply over the next 1-2 weeks, with about $20b/day of supply
  • expected globally. About 3/4 of this supply you should see via futures. It is also important to note that the longer we've stayed at these levels, the more supply becomes "irrevocable" — ie. the supply will come even if we rally back.
  • Fundamental Flows: Just two weeks after the largest Global Equities INFLOWS ever (+$33B), we get the largest weekly OUTFLOWS ever (- $30B....over half was SPY). Again, this appears to be a flashing sentiment shift, but a week doesn't make a trend. That said, the above does make a mean sound bite though.
  • Client positioning: As of yesterday, client gross positioning ROSE 5% to new highs (and we heard similar at a top competitor). Nets came down, but to find a floor in a 10% 2-week-long correction, you need to see some real portfolio reduction ie adhering to the words of Colonel William Prescott, don't fire until you see the whites of their eyes.

Other datapoints that are relevant:

  • SPY call open interest at all-time high (bearish)
  • Are you glass half-full or half-empty? I've heard bearish arguments driven by "the S&P still trades at 21 times earnings!" and bullish arguments driven by "the S&P is trading at only 16 times NEXT YEAR'S earnings!"
  • Technically, the 100-day moving average has proved critical support for the past couple of years, but we sliced through it yesterday. SPX 2540 is the 200-day, which we haven't breached in 20 months.
  • SPX currently down 3% YTD. Through yesterday client performance is hanging in, with both Equity Long/Short and Quant performance in range of flat to down 1%.

Bottom line, we haven't reached the short-term bottom, but you'll know it when you see it (or at least 5 minutes later!). But longer-term, I do believe this is a genuine regime change, one where you sell-he-rallies rather than buy-the-dips.

Full letter courtesy of Robin Wigglesworth


GUS100CORRINA Deathrips Sun, 02/11/2018 - 18:05 Permalink

Goldman's Shocking Capitulation: The Buy-The-Dip Era Is Dead, "This Is A Genuine Regime Change"

My response: I AGREE COMPLETELY!!! We are now in a "SELL THE RIP" mode versus "BUY THE DIP" mode until the corruption news settles down and people are brought to justice.

American "POLICE STATE" PROGRESSIVE LIBERALS are in SHOCK that HRC and "OBOZO" might be arrested and charged with TREASON.

In reply to by Deathrips

Theosebes Goodfellow Yog Soggoth Sun, 02/11/2018 - 23:06 Permalink

~" Not sure whether it is legal to purposely misinform investors, but then I have never thought about giving money to others to invest, so how does it feel?"~

Well, technically speaking, it sounds like they only misinformed some of their investors, not all of them. As far as never having thought about having had others invest money for you, not everyone is capable of all thoughts. As far as how it feels, if you are investing via feelings you probably don't deserve to have money in the first place. Use logic and reason, they will serve you much better over the long run.

In reply to by Yog Soggoth

Kefeer Jumanji1959 Mon, 02/12/2018 - 06:40 Permalink

Charles Nenner just did an interview with Greg Hunter and he is saying that the DOW will be down to near 5K around or in 2020.  An interview he did on December 14, 2017 he called the top and told his clients to get ready for the VXX; if they listened they would have gained over 100%.  A side note he says the middle of this year will be the opportunity for precious metals and is calling for a $2500 gold price within a few years.


He also said that we are in the World War cycle and it should manifest itself over the next 2-3 years.   We all hope he is wrong.


In reply to by Jumanji1959

Yog Soggoth Quantify Sun, 02/11/2018 - 21:09 Permalink

The Lone Ranger is out checking out the countryside on Silver one day when he gets ambushed by an Indian war party. He wakes up to find himself tied up in a teepee. He looks around and sees the indian chief and a bunch of others. The chief says to him, "Lone Ranger! At last I have you! I am going to sacrifice you to the gods in three days at our festival. I am, however, a fair man, and I will grant you three wishes, one for each day. What is your first wish?" The Lone Ranger replies, "I'd like to speak to my horse." The chief sends a warrior to fetch Silver, and the Lone Ranger whisper's in silver's ear. Silver takes off, and doesn't return until later that evening, with a beautiful blond on his back. The blond goes into the teepee with the Lone Ranger and spends the night. The next morning, the chief comes back in, and says "Lone Ranger! That's quite the horse you have! What's your second wish?" Lone Ranger says, I'd like to speak to my horse again." Chief sends for the horse, and the Lone Ranger whispers in his ear again. Silver takes off, comes back that evening with a brunette, even more beautiful than the blond. She also spends the night. Chief comes in the next morning and says "Lone Ranger! I can't wait to have your horse, but fair is fair. What's your last wish?" Lone Ranger says "I'd like to speak to my horse again, ALONE!" Chief thinks, What can it hurt? A redhead? He brings in the horse and everyone leaves. Lone Ranger grabs Silver by the ears, looks him square in the eyes and says "Now Silver, listen to me! I need a posse. P.O.S.S.E.!!!"

In reply to by Quantify