Need to Know: Why Goldman Sachs strategists say a ‘sizable correction’ isn’t about to come for this bullish investor frenzy
Why Goldman Sachs strategists say a ‘sizable correction’ isn’t about to come for this bullish investor frenzy
Critical information for the U.S. trading day
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The market rally in the past month that pushed the Dow DJIA above 30,000 points may have just set the stage for investors’ bullish expectations into next year.
As investors cycled out of outperforming technology stocks on Wednesday, they piled into cyclicals and downtrodden sectors like energy, financials, and real estate. This coincided with a frenzied enthusiasm that pushed DoorDash DASH shares 86% higher in the food-delivery company’s public trading debut.
These shifts are indicative of the investor bullishness described in our call of the day from a group of strategists at Goldman Sachs, who say that “more moderate risky asset returns are likely from here, rather than an imminent risk of a sizable correction.”
Alessio Rizzi and his team at Goldman wrote that a number of positioning indicators at very bullish levels suggest a noticeable improvement in growth expectations and reduced uncertainty around a recovery in 2021.
Positioning indicators are metrics that show the positions held by investors, and give representative examples of market sentiment. They can provide bellwethers of risk, including whether assets are flowing more toward risky or safe bets.
One of the bullish metrics that the Goldman strategists highlighted are put/call volume ratios, which describe whether more investors are buying put options — the option to sell a stock at a predetermined future price — or call options, which allow investors to buy a stock at an agreed future price.
We’re deep into call territory, with put/call ratios nearing the limits of their typical distribution, according to the Goldman strategists. Other indicators, like bull vs. bear investor surveys, have turned similarly bullish at extreme levels, they said.
Rizzi and his team said that indicators like put/call ratios tend to provide the most useful signals of where the market is moving when they are extreme, and that “that bullish positioning levels tend to remain strong for a long period if macro remains supportive.”
The macro environment may be headed in that direction. The European Central Bank is set to increase stimulus on Thursday, and Treasury Secretary Steven Mnuchin is offering a $916 billion stimulus package to Congress to try to break a legislative deadlock.
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