“This is a no rules market,” Goldman’s Scott Rubner said Monday, writing from West Palm Beach.
Rubner, some readers might recall, predicted a swoon for equities in early August, even as he didn’t get the fund outflows he was looking for. Now, he sees a “very positive” window for stocks between this week and the September FOMC meeting. The “pain trade,” he said, is higher following the onset of two-week vacation blocks.
The figure below illustrates the largest nine-session VIX decline in history. Rubner flagged the historic vol deescalation on the way to describing US equities as “a bunch of RINOs,” where that’s “Recession In Name Only.”
As I’ve put it again and again in recent days, the growth scare (and the perception of outright panic ostensibly conveyed by the VIX on August 5) was a Fata Morgana.
With vol receding and markets trending higher, systematic re-leveraging is back in play, particularly from first-mover CTAs. In a flat tape, Rubner’s estimates see nearly $60 billion of demand over the next week, almost $73 billion in an up-trade and $36 billion in a down tape (figure on the left, below). In other words, it’s a “green sweep,” as he put it.
Note that according to Goldman’s futures strats team, CTA selling in equity futures was $159 billion over the last month, and $200 billion across all systematics, inclusive of vol control (figure on the right). “We just witnessed one of the largest and fastest unwinds that I have ever seen,” Rubner marveled.
Now, though, with vol smashed and stocks having reclaimed key levels associated with CTA re-allocation, risk has a green light.
“CTA re-leveraging, target vol, unwinding of puts and corporate demand will act as a tailwind as sellers are out of ammo, forcing fundamental investors in,” Rubner went on, noting that the impact of these flows will be more pronounced given thin August markets.
The bottom line, he wrote, is that there’s a four-week window for dip-buying opportunists before things get “tricky” again towards the end of next month. “The bar for being bearish at the beach into a Labor Day BBQ party is high,” Rubner said.
