“Will Retail Traders Force Institutions To Chase Stocks” – Why Goldman Expects “Massive” Rotation Into Stocks In Q2

“Will Retail Traders Force Institutions To Chase Stocks” – Why Goldman Expects “Massive” Rotation Into Stocks In Q2

Over the weekend, when looking at the latest JPMorgan Prime Brokerage data, we noted that the “pain trade” remains higher as unlike retail, hedge funds have been selling every rally aggressively with the largest US bank seeing “net selling in 8 of the past 9 days,” during which stocks have staged a torrid rally.

At the same time, we also observed that the bulk of the recent market meltup has been on the back of a massive short squeeze and covering of puts (creating a delta and gamma squeeze) which makes it especially difficult to predict what happens next as most if not all of the recent market meltup has been due to technicals and positioning, not fundamentals.

Still, one can conclude that either hedge funds will reverse their selling soon and jump on board the retail buying bandwagon (at which point it will again be time to short), or retail will run out of buying power amid the hedge fund-to-retail “distribution”, and stocks will tumble once again.

The outcome of that tensions is, according to Goldman’s flow trader Scott Rubner, the $64 trillion question: as he writes in his latest Tactical Flow of Funds note – in which he says that the top institutional investor question has been “who is buying the market +500 points in the last two weeks?” do retail traders force institutional investors to re-leverage back into the equity market above (the prior ceiling of $4600).

Here are Rubner’s 5 main (bullish, of course) observations:

The S&P 500 has closed up more than >1% in 6 out of the last 8 trading days. In the last 80 years, that’s only happened 2 other times.
US bonds are down -6.3% so far this year, on pace for their worst year on record (record is – 2.9% in 1994).
If the month closed today, US bonds would have the worst monthly performance in 42 years.
“I expect a MASSIVE rotation into equities in Q2. When do we start talking about new all-time highs for US Equities? Great Rotation / Great Migration type of stuff.”
Global PWM’s are making the calls today for next week. “hey, so we have these bonds, and we are sitting on cash”….. but inflation, yadda yadda yadda. new Q = new inflows.

Going back to the divergence between retail and institutional investors, here is why Rubner is “tracking the message boards again”:

US Households own 39% of the $80 Trillion US Equity Market. ($31 Trillion)
Hedge Funds own 2% of the US Equity Market. Households own 20x more market cap than Hedge Funds (ZH: this, however, is a grossly inaccurate at best, since household ownership is a plug in the Fed’s Flow of Funds report, and if anything, represents how little the Fed actually knows where the money ends up).
Goldman’s analysis shows that the largest owner of the equity market, has scope to become the largest trader of the equity market yet again (ZH: we very much doubt this, which is nothing more than Goldman’s desperate attempt to goal seek a bullish case).
This is the biggest swing factor in the market today, and also the largest source of aggressive trading demand (at a time when liquidity and value traded has decreased).
You have to remember, despite the bearish macro backdrop and investor sentiment, this is not true for message board traders. Open the apps’s today to get the vibe.

The next few charts show the surge in recent retail participation:

This is where retail participation is highest:

Rubner then takes a look at the bigger tactical flow of funds checklist, and gives the lists the following 12 reasons why the S&P rallied ~500 handles in 11 trading days, and why he expects it will keep rallying?

April is a strong seasonal month. Over the last decade the average return for April is 2.34%, the second best month after November.
Great Rotation – Investors are reducing money in bonds, 11 straight weeks of outflows, and huge redemptions from cash funds losing to inflation by -7%. Households have $15 Trillion in cash holding.
Retail is back. Retail participation has dramatically increased and retail are buying weekly calls again. (+50% moves in GME, and huge gains in core retail favorites, TSLA/NVDA). Watch TSLA stock split news. They have fully paid their April 18th tax bill.
Great Repatriation Migration “I’m coming home”. This was the largest monthly move back into the USA on record (out of rest of world). Lot of $ is parked in low quality overseas. Foreigners also coming back to the US.
Systematic. We have +$46B worth of equities to buy from CTAs. This will take us through the end of the quarter.
Corporates are still the largest buyer in market, in a modest blackout window. Net demand (buybacks ex-issuance) is expected to be a record $700 Billion.
$3.5 Trillion worth of option notional rolled off two weeks ago. Gamma is short. The street is very short gamma around ATM strike.
PWM Model portfolios are aggressively selling bonds / credit, and moving back into US quality / tech / dividends.
Our PB team, showed a further capitulation of gross and net HF exposure.
HF’s generally are under exposed to a rally, and want not lag indices before statements go out on quarter-end.
Sentiment remains below COVID, March 2020 lows. (-1.8%)
Liquidity remains challenged. You can trade $5M on the screens of ESA (E-mini futures), this ranks in the 4th percentile in the last decade. This has had the most impact on the shorts trying to cover.

Goldman’s bottom line: “flow of funds are still positive for the next two weeks, and there is a lack of supply.”

Tyler Durden
Mon, 04/04/2022 – 12:45

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