S&P 500 Momentum: Goldman Sachs’ Optimistic Stance

Crucial Insights for U.S. Traders:

The stock market is showing signs of further gains, while bond yields are on the decline. Following a holiday break, bond markets are rallying, partially driven by increased demand for safe-haven assets in response to the recent attacks by Hamas in Israel. Additionally, two Federal Reserve officials have expressed reservations about raising interest rates, and more Fed speakers are scheduled to address the issue on Tuesday.

Investors, particularly those involved in the oil market, will keep a close eye on developments in the Middle East for potential escalations. However, history has shown that Wall Street often quickly returns to its regular rhythm, especially as inflation data and the beginning of earnings season draw near.

Goldman Sachs has an interesting forecast, suggesting that a significant group of momentum traders is gearing up for substantial purchases of the S&P 500 in the coming month.

A chart from the bank illustrates historically low exposure to U.S. equities among commodity trading advisors (CTAs), who typically profit from bets on futures markets and tend to follow market trends. According to Goldman Sachs, CTAs currently hold a short position of approximately $90 billion in global equities, an unprecedentedly low reading. In the U.S. market alone, they maintain a record-high short position of $47 billion in equities.

Goldman Sachs states, “According to our model, CTAs are now inclined to buy SPX under all possible scenarios over the next month.” This implies that those CTAs who have been selling the S&P 500 may potentially reverse their positions and become buyers if Goldman’s prediction holds true. However, it’s essential to note that not everyone advises blindly following trend-focused CTAs, as their sentiment can change suddenly.

While October has a historical reputation for market volatility, it can also signal the beginning of a seasonal rebound for stocks, as noted by MarketWatch’s Mark Hulbert. Jeff Hirsch, the editor of the Stock Trader’s Almanac & Almanac Investor Newsletter, often refers to October as a “bear-killer, bargain month, and turnaround month,” characterized by robust, albeit occasionally volatile, trading.

An Equity Clock seasonality chart has been circulating, potentially lending further support to the idea of buying stocks. Seth Golden, Chief Market Strategist at Finom Group, also presents a chart that could be encouraging for potential buyers.

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