What Wall Of Worry? Goldman Finds Investors Are "Unusually Bullish"

One month after Goldman's proprietary crash indicator rose to 67%, the highest level since the financial crisis and dot com bubble, and suggesting a crash may be imminent, stocks continue to hit new all time highs, stumping anyone who still believes there is such a thing as an efficient market.

So has Goldman thrown in the towel on its bearish posture (recall Goldman's 2017 year-end price target for the S&P is still just 2,400 rising to only 2,600 by the end of 2019, less than 50 points away from where it is now)? Well no, because in a note from Goldman's options strategists, John Marshall and Katherine Fogerty, the two caution that "investor positioning is unusually bullish" ahead of earnings season.

Specifically, they look at index and single stock options pricing, which shows that "investors have positioned for near-term asymmetric upside." As a reminder, we highlighted this earlier this week, when we showed that according to Morgan Stanley data, there has been a near record scramble to buy S&P calls, to wit: "Investors in the SPX options market have bought more delta in the last two weeks than at any point since at least 2007."  In other words, investors are now finally buying into the rally, but not via stocks, but via levered, upside calls, a stampede which typically takes place when investors are confident there is virtually no downside risk left. It usually precedes periods of sharp risk corrections."

And now, it's Goldman turn: picking up where Morgan Stanley left off, Marshall warns that "in the context of the acceleration in the equity rally over the past two months, we believe this options positioning is evidence of a crowded equity market and see it as a negative sign for stocks over the next month."

What usually happens in cases like this? "Following similar positioning over the past five years, returns were -1.9% below average in the subsequent month."

Yes, not even Goldman is bullish heading into Q3 earnings, and as a result notes that "while we typically recommend buying calls ahead of earnings events due to the strong systematic returns to that strategy, this quarter we suggest a more directionally balanced approach of buying single stock calls and puts across a broad list of names."

Translation: Goldman's prop traders appear to have been short (unlike the bullish flow side) heading into earnings, and are now hoping for a painless way to get out.