Three weeks ago, when stocks were holding on to dear life - and key support levels - amid a wave of bearish sentiment which threatened to drag risk below its July lows, Goldman took the other side of the trade and said it expected a huge market meltup in the coming weeks, a call which it doubled down on one week later. In retrospect, the vampire squid was absolutely correct, with the S&P soaring by 400 points in the past month...
... in the process demolishing the wall of worry, even if the meltup was widely missed by professional speculators - many of them crushed by the turmoil in bond markets - who according to Bloomberg, were going risk-off in stocks, cutting leverage at the fastest pace in months as many bearish bets backfired.
To be sure, the past months has been one for the history books; just consider these statistics:
The S&P 500 ended October at 32.5 times profits, according to Leuthold Group that uses a five-year normalized earnings estimate; such a multiple was seen only once before this year - during the dot-com era.
And yet, the S&P 500 is already 7% above the highest year-end target in a Bloomberg survey of Wall Street strategists that was conducted in January.
Stocks rose for a fifth week for their longest rally in 14 months. After taking off amid robust third-quarter earnings, equities got a further boost from a string of dovish pivots from central banks.
the Nasdaq 100 just scored two perfect weeks in a row, something that has happened only once before - in 2017. That year also marked the last time when the gauge posted gains in all but two sessions over an 18-day stretch. On that count, the S&P 500 just notched its best run since 1990.
the Nasdaq 100 is up in 16 of the past 18 days - an extremely rare advance, and missing out is costly. And yet, similar runs have come in dismal years for equities - 2007 and 1999, specifically - suggesting to some that a crash may be dead ahead.
And yet, it is this temptation to overthink a market by Wall Street veterans who have never seen a meltup such as this one, that has held kept Wall Street pros on the sidelines and is enabling a continued meltup in stocks.
“While I turned a bit more cautious at the start of the week, the trend remains your friend,” said Chris Weston, head of research at Pepperstone Financial Pty. “It becomes more of a FOMO trap into year-end.”
“Global central bankers recommit to the bubble,” Senyek said. “There’s probably a good bit of performance chasing going on as well. We see more upside from now to year-end.”
“Is it time to pull the rip cord or is this what the market is trying to do in order to suck in every last dollar out?” said Alon Rosin, Oppenheimer & Co.’s head of institutional equity derivatives. These are the “things that make you go ‘hmmmm,’ but in the meantime, there is just too much speculation across asset classes that is working and FOMO is fully on here into the year-end chase.”
And yet, while institutional investors have mostly sat the recent rally out as Bloomberg describes in "As Stock Markets Set News Records, Hedge-Fund Managers Aren't Buying the Frenzy", the same can not be said for retail investors. Oppenheimer's Alon Rosin, had the first-hand experience with the retail euphoria. His older sister, who has never traded a stock, just asked about how to buy Tesla shares online. And that made him wonder how far this bull market can go.
Today, courtesy of Goldman, we may have the answer, because the same Goldman flow trader - Scott Rubner - who said in mid-October that the meltup is just starting, has a stunning update for what is in stock. And it appears that at this point, going simply on technicals and flows, a 5,000 target on the S&P is not unreasonable.
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Writing that "the number #1 question to hit my IB this week: Why did retail traders return into the US stonx market like its 1999 this week when stimulus checks have run out? And “how high (the S&P) actually go before year-end”?", Rubner's answer is - in a word or two - much, much higher.
Noting that US Households now own 38% of the $75 Trillion US corporate equity market...
.... or 12x the size of the market cap owned by hedge funds...
... and after becoming the largest owner of the stock market, retail is now also the largest trader of stocks as "everyone in the now in the pool" in what may be the biggest distribution phase in human history. What does this mean in quantitative terms? Here is the stunning explanation:
I have roughly $15B of non-fundamental US equity demand every day of November and I might be understating the money flows, not including YOLO.
In the last two weeks, option trading in the USA has never been greater! After following the retail trading community for the last 18 years, I could never imagine typing these large numbers.
Here is the punchline: single stock option notional (140%) now exceeds single stock shares notional, 72% of options traded have an expiry of two-weeks or less (think 2-3-4 days), and activity on the message boards is as high as it has been all year.
Here is a breakdown from Rubner of daily single stock option notional traded in the last two-weeks "as we enter the Metaverse"
- Mon 25-Oct $657bn – TSLA day = +12.66%. This was the retail yolo inflection.
- Tue 26-Oct $680bn - This is largest single stock option notional traded on a Tuesday.
- Wed 27-Oct $694bn - This is largest single stock option notional traded on a Wednesday.
- Thu 28-Oct $711bn
- Fri 29-Oct $894bn - This is largest single stock option notional traded on a Friday.
- Mon 01-Nov $664bn - This is largest single stock option notional traded on a Monday.
- Tue 02-Nov $582bn
- Wed 03-Nov $655bn – In terms of # of contracts, Wednesday saw the 7th largest number of calls (31.60M) traded in history, going back to 1992. This is where things became broad based.
- Thur 04-Nov $904bn - This is largest single stock option notional traded of all time. Yesterday saw the 3rd largest number of calls (32.78M) traded (exceeding January 28/29th). This was not even an expiry today. I expect volumes massive today. What was special about Thursday, a non-expiry day? Nothing. There will be massive volume going through at the close today.
A more detailed breakdown of the total single stock option volume on Thursday: (Retail has pivoted into calls on the biggest stocks, which drive the index higher).
- $234bln TSLA
- $231bln AMZN
- $ 71bln NVDA
- $ 54bln GOOGL
- $ 25bln AAPL
- $ 20bln AMD
- $ 20bln FB
- $ 16bln GOOG
- $ 12bln MSFT
- $ 12bln MRNA
- $209bln All other underlyings
... or a grand total of $904BN, just shy of $1 trillion in notional option volume!
So what comes next? According to Rubner, when he looked at GS Tactical Flow of Funds from November 2020, "it looks like retail activity spiked aggressively into Thanksgiving holidays, “What trades have you made during Thanksgiving Dinner” convo."
In short, the 400 points meltup over the past month is just the beginning; what comes next will blow everyone away (at least until Gartman turns bullish).
But wait there's more, because in addition to this epic retail inflow frenzy, November and December have long been the two best months for stocks...
... and as Rubner notes below, we are facing an absolute waterflow of new inflows into year end. For the reasons listed below reveal, the Goldman flow trader is looking for an unloved FOMO led rally From November 1st to “Thanksgiving”, which will add to the already stunning statistics of 2021:
S&P has recorded 58th ATH last night which is already the 4 most ever ATH’s recorded in a single full year (77x in 1995, 62x in 1964, and 62x in 2017), that 1 new ATH for every 3.58x trading days this year.
So without further ado, here is why Goldman expects nothing but levitating until the end of the month:
1. Corporate Buybacks – November 1st, Monday, re-opens the buyback window and November plus December opens the best two-month period of the year for buyback executions or $~4B per day to close out 2021. Best corporate authorizations on record.
- a. 11/1 is the GS official start to the buyback window (65% of corporates are in the open window). The GS buyback desk forecasts $887B worth of executions for 2021. This would be the second highest year on record (after 2018).
- b. There are 42.5 trading days in November and December including major vacation weeks and low liquidity.
- c. In Q4, the GS buyback desk estimates +$230B repurchases, this is broken down by +$70B in October during the blackout window using 10b5-1 plans and +$160B in November and December.
- d. The breakdown of executions per quarter is as follows: Q1 - $203B (actual), Q2 - $234B (actual), Q3 - $220B forecast, Q4 - $230B forecast.
- e. The $160B of repurchases in the last two months of the year is ~$3.80B per day, every day. This is significantly front loaded into November (and should pace above >$4B).
Buybacks by month...
Generation Investor ("Gen I") – there is clear evidence that the WFH trader (look at SHIB for example) has returned back into the equity market and time to pay for X-mas gifts. There is a MASSIVE return (and pivot) of retail traders and weekly call options:
- f. US households own 38% of the $75 Trillion US corporate equity market. This is a 200bp increase since the start of the year. (was 36% on 1/1/21)
- g. US households increased their equity market cap by 200bps or $1.5 Trillion YTD. This increase is nearly the full size of the HF industry, 300bps. Community meets capital in 2021.
- h. Retail investors added +$5.6B worth of equity fund demand every day last week, making $28 Billion and accelerating. The single stock numbers are even more staggering. Retail has pivoted into mega-cap tech (TSLA, MSFT) and out of speculative #YOLO (GME, AMC).
3. New month = New inflows. November monthly inflows are massive and have overshoot historical estimates in each of the last 8 months.
- i. Over the last 30 years, +20bps of new money comes to the market every November, on $28 Trillion in assets, this is >$56 Billion of new $ ~3B per day.
4. 2021 Passively allocated – you give me money = I buy. You ask for money = I sell. Flows have been one-way all year and I expect this to continue.
- j. Global equities have logged $1.1 Trillion worth of inflows during the last 52 weeks. This is 4x larger than any 1-year period in history.
- k. I get asked a lot about this market structure dynamic. USA fund assets are now tilting passive with 52% AUM passive vs. 48% AUM active.
- l. Globally active funds (54% of AUM) still exceed passive funds (46%). The last 4 year have averaged a 150bp change into passive, so in roughly ~2 years, global active and passive should be 50% vs. 50%.
5. Index Construction is key. Bad Breadth? Here is an ETF example.
- m) If I allocate $1 into the SPY ETF: This is what happens - 6.3 cents to MSFT, 6 cents to AAPL, 4.4 cents to GOOG/L, 4 cents to AMZN, 2 cents to TSLA, 2 cents to FB/MVRS, 25 cents every $1 “Equity Allocation” goes into these 6 stocks.
- n) If I allocate $1 into the QQQ ETF: This is what happens - 11 cents to AAPL, 11 cents to MSFT, 8 cents to GOOG/L, 8 cents to AMZN, 6 cents to TSLA, 4 cents to FB/MVRS, 48 cents every $1 “Spicy Growth Equity Allocation” goes into these 6 stocks. ATH's for both SPX and NDX last night.
- o). Both Mutual Funds and HF get more underweight as these big 6 charge higher. Here is a chart from Goldman's prime services team (the bank is working on the new "FAAMG" acronym, our advice of course is GAMMA)
6. Goldman is calling this “the last dance” data point – Flows follow performance in typical “boo-ya Jim CNBC fashion”. 2022 will be crazy hard. There is some ground needed to catch-up to benchmark performance in the last 2 months here.
- p. There have been 15 times since 1928, that the S&P is up >20% or more through October. The median return for the rest of the year (last two months only) is +5.92%, with an 80% hit rate. 2021 would be the 16th time.
- q. This was the best start to the year since 2013 (taper tantrum time?), +23.16%. There is also some positive follow through in January/Q1.
7. Seasonals are the best of the year. “You are here” and hard to find a better hit rate. Seasonals are also very good during year 1 of the presidential cycle.
- q. We are entering the strongest month (and best two month period) of the year with a median return of 2.1% and positive hit rate of 71% going back to 1985.
8. There have been a lot of weird moves in micro world during Mutual Fund year-end. In addition, pension Fund selling is now behind us and month-end fears were another “wall-of-worry” removed.
- r. 801 Equity Mutual Funds report their fiscal year-end today representing +$925B in assets. 24% the number of funds or 18% of AUM. Year-end statements go out to "mom and pop". There have been some random micro moves this week. Selling pressure looked to accelerate in names that were down big on the year before mutual fund year-end. This could be seen in China ADRs for example.
- s. As of yday's close, our GS model estimates $24bn of US equities to SELL before month end. This ranks in the 64th %ile in absolute $ value over the past 3yrs (89th %ile since Jan 2000), from GS Sales and Trading colleague, Gillian Hood.
9. While the systematic non-fundamental demand impulse has faded, it is still net positive and adds to the daily buying every day
- t. GS systematic strats team models +$21B to buy over the next 1-week assuming a flat tape or $4.2B of non-fundamental demand per day.
10. #TINA. Happy Trails to Bond Inflows. Happy Trails Cash on the sidelines earning a negative real yield. "Great Rotation" return?
- u. GS Wedge (+FI + Cash - Equity) = $4 Trillion. Despite the record run into equity funds, the real story has been fixed income inflows. At what level in yields does this slow / stop / reverse? Great-rotation-y.
So while it is clear that Goldman expects a historic meltup for at least the next few weeks, the answer what that means quantitatively comes from Goldman managing director Bernhard Rzymelka who notes that the emini has once again broken back inside the wedge as expected: "This opens the market for material upside if it can break above the wedge (currently 4720 but rising daily)."
Bottom line: according to Rzymelka, The "late cycle" meltup has started: the chart below shows the inverted S&P on the right axis (orange, log) versus the implied volatility of a 2m 4700 call (blue, left). Vols have started to notably outperform spot and suggesting growing risk of an accelerating melt up higher.
Finally, looking at Monday's action, Rubner writes that "I anticipate a huge activity day on Monday as well from the retail trading community. This is interesting. Prior retail herding events have occurred late in the month, this time it is at the start of the month. What is the duration of activity this time around? Stay tuned."
As usual, the full report is available to pro subs in the usual place.