Goldman Sachs traders have found that since last week, foreign investors have reduced their selling pressure on US Technology stocks, while hedge funds are tentatively starting to buy back. The good performance in the first quarterly reports, stable retail Bids, and the corporate buyback window are all releasing Bullish Signals. To confirm the market's upward trend, improvements in the breadth of the market, liquidity, and the proportion of ETF to total Trade volume are still needed.
The US stock market may have reached an upward turning point, but three key obstacles still need to be overcome.
According to Goldman Sachs' top US trader John Flood's latest market observations, the US stock market has experienced significant volatility recently, and some Bullish Signals have emerged, including a decrease in overseas selling pressure on large Technology stocks and notable single-day net Buying behavior from hedge funds.
Flood emphasizes that the next focus should be on three key confirmation signals—market breadth, liquidity depth, and ETF trading volume ratio—improvements in these signals will be important support in confirming the market's upward trend. Until confirmation signals appear, aggressively chasing gains may still face risks.
Are Bullish Signals starting to show? Decreased overseas selling, hedge funds tentatively replenishing.
From April 3 to 7, the S&P 500 Index sharply dropped from 5462 points to a year-to-date low of 4835 points, followed by four consecutive trading days of rising, with a total rebound of 735 basis points, closing at 5525 points.
Flood observed that last week, the heavy sell pressure on large Technology stocks, primarily driven by large international sellers, began to decrease. After Intel and Google released their Earnings Reports, some scattered Asset Management institutions increased their demand for the 'Mag 7', which all constitutes positive signals.
Whether this dynamic of increasing long-term Buying in the USA and decreasing international selling will continue will be a close focus for Goldman Sachs.
Another bullish signal is that last Wednesday, the Goldman Sachs brokerage platform experienced the fifth largest net buying day in the USA stock market over the past year (2.2 times the standard deviation), mainly driven by short covering of macro products and long buying of individual stocks. Among them, macro products and individual stocks accounted for 68% and 32% of the total nominal net buying amount, respectively.
Although this is only a single trading day's situation, covering macro shorts and buying individual stocks is usually considered a more constructive behavior. Flood stated that if this kind of activity could be seen a few more days next week, he would become more optimistic.
In addition, Flood pointed out three current positive dynamics in the market:
Corporate earnings reports are performing reasonably well: Google's solid performance report avoided a potential second wave of "Mag 7" sell-offs. Currently, companies representing 30% of the S&P market cap have announced earnings reports (another 40% will be announced this week). 46% of companies exceeded earnings expectations by more than one standard deviation (slightly below the historical average of 48%), and only 10% of companies had earnings below expectations by more than one standard deviation (below the historical average of 14%). Overall, earnings reports have performed better than the pessimistic expectations of traders.
Retail buyers remain undeterred: unless unemployment begins to rise, retail investors' bids are likely to continue.
The corporate buyback window has opened: According to Goldman Sachs, the corporate buyback window from April to May has historically performed strongly. These two months are the third best time of the year, accounting for 20% of executed buybacks. Goldman Sachs' buyback trading department estimates authorized buybacks at $1.45 trillion, with executed buybacks at $11.6 trillion. This will provide support for the market during the peak earnings report season. Additionally, the pension rebalancing at the end of April is expected to bring about $15 billion in stock bids, and various indicators from Commodity Trading Advisors (CTA) also generally show bullish signals.
Cautious sentiment persists, and three market indicators still need improvement.
Despite more constructive capital flows and price movements last week, Flood believes the market has not completely escaped danger. He noted that the S&P 500 Index is now trading at the same level as before the announcement on April 2, "it feels a bit off."
Flood also indicated confidence that the market bottom has been raised. On the trading day after the announcement of the tariff policy, most investors he communicated with believe that a reasonable bottom is around 4,600 points (based on the median calculation of a 25% retracement from the peak during economic recessions), and now those buyers expecting a bottom at 4,600 points have mostly adjusted their expectations to 5,000 points.
Flood emphasized that further progress must be seen in the following three areas before he advises traders to Buy more aggressively:
Market Breadth: Currently still far below historical averages. Broader stock participation in the rally is needed.
Liquidity: The best Bid and Ask depth for S&P mini Futures is currently about 4 million dollars ($4mm), although it is higher than the April 9 low of below 1 million dollars (the last time this happened was in March 2020), it is still far below the historical average of about 13 million dollars. This means the market is relatively weak; significant price fluctuations can be triggered with minimal capital, and preparations should be made for ongoing extreme volatility.
Proportion of ETF in total trading volume: Due to ongoing challenges in Futures liquidity, professional investors are increasingly relying on ETFs for hedging. The proportion of ETF trading volume peaked at 44% on April 9 and is currently around 35%. Flood hopes to see this ratio fall below 30%, which usually indicates a decline in hedging demand and an increase in risk appetite.
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