Closing out Friday, a day which we correctly predicted would see a major ramp higher not just because of the market's overdue pricing-in of Fed rate cuts as well as extremely oversold market conditions, but because the market is starting to prepare for the massive month-end pension rebalancing which will see $30BN in stock buying…
… Goldman desk trader John Flood published a must read note (available to all professional subs in the usual place), in which he summarizes Friday's action and reveals why Friday's stock surge may be something more than just your garden variety dead cat bounce.
As Flood writes, Goldman's desk was a 7 on 1 – 10 scale in terms of overall activity level, with total executed flow across US equities had +683bp buy skew vs 30d avg of -96bp sell skew. Meanwhile, hedge funds' 12% buy skew was highest since May 30th and 94th percentile vs 52w avg. More importantly, long-only (i.e. vanilla mutual funds) had a +1% buy skew was their first buy skew in 3 weeks, with Energy +17%, Cons Disc +7% and info tech +6% were most noteworthy sector skews.
Why this major buying pulse? Well, as Flood explains echoing what we said yesterday, "the final Michigan sentiment report for June showed notable DOWNWARD revisions to the inflation expectations component. The 1-year expectation ticked lower from +5.4% to +5.3% but more importantly, the 5-10 year expectation dropped from 3.3% to 3.1%."
This matters because as a reminder, at last week's FOMC presser Powell specially said the hot CPI and the increased Michigan expectations were the reasons why the Fed went 75bp instead of 50bp. Well, it now turns out that that outlier inflation expectation print never actually happened, after it was revised lower which is why Goldman concludes that the "baseline for July will now move from 75bps to 50bps and the mkt clearly appreciated this."
There is another reason why Friday's melt up may be the start of something bigger: as Flood explains, until Friday's S&P’s move higher "this week was primarily a low quality cover bid after HFs shorted the second most notional in the history of our PB data (last week)", as we previewed last weekend.
But Friday felt like a potential pivot point with Flood notes that the big finally got healthier "as we finally saw long-onlies come in and passively buy (they have been net sellers on every single trading session since 6/7)." Which means that for the first time in 2022, "FOMO is real at the moment" with mutual funds currently sitting on well over $200b in cash right now and buying will only intensify on moves higher.
Finally, the fund community also took advantage (as buyers) of the abundance of liquidity on the closing bell on Friday, with demand mostly concentrated in higher quality cyclicals.
In conclusion, Flood writes that Friday was not quite the "all clear" signal, but Flood would "certainly be more patient selling this pop as it was highest quality rally I have seen in over a month." And yes, as we noted yesterday, Goldman currently estimates over $30BN of equities to buy for quarter end pension rebalance, which will only provide further upside to stocks during this early part of the buyback blackout period…