After Christmas, the US stock market did not experience the Santa Claus rally that investors had hoped for. This Monday, the three major US stock indexes collectively fell for the second consecutive trading day, with the S&P 500 Index declining more than 1% for the third time in the last eight trading days.

Goldman Sachs traders also warned that even by Tuesday, the last trading day of 2024, the US stock market may not reverse its downward trend, as the adverse factors over these two days, referred to as headwinds, may outweigh the favorable factors, referred to as tailwinds.

Goldman Sachs trader and Managing Director Nelson Armbrust listed several of his bearish reasons in a report on Monday, indicating that his preferred trade is to 'buy a put spread to hedge against a long position in the portfolio.'

The report mentioned the following key points:

Gamma: On Tuesday, a large number of open options contracts betting on levels around 6050 to 6070 points are set to expire. In light of this, the overall Gamma situation will be quite unstable on Tuesday. Current long positions exceed 3 billion dollars, but a 1% increase would push Gamma to exceed 7 billion dollars in long positions, while a 1% decrease would bring Gamma back to this over 3 billion dollars position.

Rebalancing of Retirement Funds: Goldman Sachs' latest estimate on the rebalancing of US retirement funds indicates that retirement funds will sell 27 million dollars in stocks, a substantial amount that exceeds the historical level of 87%. The report warns that pension funds are not required to rebalance and can choose when and how to do so. Historically, market trends suggest that retirement funds often begin part of their rebalancing trades one or two days in advance. Last Friday's sell-off, accompanied by rising US Treasury yields, was a strong signal showing that this rebalancing situation is occurring. At the same time, last Friday's closing market orders exceeded 3.9 billion dollars, indicating that, as in the past, there may be participants trading in advance.

Commodity Trading Advisors (CTA): The decline in US stocks last Friday is expected to trigger more CTA sell-offs in the coming days, although the scale is not large, and it is not unrelated to last Friday's drop.

Liquidity: As Goldman Sachs anticipated, liquidity has significantly decreased compared to two weeks ago. The S&P's highest bid depth is currently $8.9 million, while the average year-to-date level is $13.9 million, a decrease of 35%.

The report states that Armbrust's benchmark view is: "There are more headwinds than tailwinds these days, so I will buy S&P Put spread options, close to Tuesday's hedge portfolio length."

It was previously mentioned that a major driver for last Friday's decline in the US stock market was that US pension funds would sell $21 billion of US Stocks and buy an equal amount of Bonds by the end of the month. Before a slight sell-off last Wednesday, the rebalancing amount had reached $30 billion. Based on the absolute dollar value of all transactions over the past three years, the $21 billion worth of US Stocks to be sold ranks in the 86th percentile, meaning it is higher than 86% of levels in the past three years.

In addition, in the absence of significant news, data, and light trading at the end of the year, the 10-year US Treasury yield, which serves as an anchor for asset pricing, affects the stock market—the higher the yield, the greater the pressure on the stock market. Last Friday, the 10-year Treasury yield hovered at a seven-month high, increasing the downward pressure on US Stocks.

Editor/Somer