According to Scott Rubner, tactical strategist at Goldman Sachs Group Inc., the S&P 500 Index can only go down any further and he warns: “I don’t buy on dips.”
The reason for that is that this Wednesday, July 17, has historically marked a turning point for stock index returns, said the managing director of Goldman’s Global Markets division, citing data dating back to 1928. And what follows is August – normally the month with the best outflows from passive stocks and mutual funds.
Weak seasonality, excessive positioning and all the excellent news that has already been priced in mean that the index is on the verge of a summer correction. Goldman’s trading department has been tending to this assessment since a minimum of the start of June. “The pain trade is no longer higher from now on,” Rubner wrote in a note to clients on Wednesday.
The S&P and the tech-heavy Nasdaq 100 slumped on Wednesday on concerns that U.S. politicians could take a tougher stance toward China and Taiwan, impacting global chipmakers.
The declines come after the S&P 500 hit 38 latest all-time highs in 2024, putting the stock index heading in the right direction for its second-highest closing highs in about 100 years, Rubner wrote, adding that only 1995 appears to be stronger.
After this winning streak, stocks are exposed to weak inflows and remain vulnerable to negative headlines. No inflows from passive investors or mutual funds are expected in August as capital has already been deployed for the third quarter, Rubner said. For trend-following systematic funds, positioning has reached its maximum length, suggesting there isn’t a scope for further buying.
While some investors argue that strong corporate earnings, a possible short-term rate of interest cut by the Federal Reserve and the increasing possibilities of a Donald Trump victory within the US presidential election would give stock prices an additional boost, Rubner believes that these developments won’t be positive catalysts.
Such events are already factored into market prices, and the profit margins of the most important technology stocks which have driven the market to record highs are remarkably high. “And by high, I mean they have to be great,” he wrote.
Rubner recommends that his clients purchase lookback put options for the Nasdaq 100 and the S&P 500 expiring in December, which permit the holder to exercise a derivative at the most cost effective price of the underlying asset in the course of the term of the choice.
