How to see the big rebound of US stocks? Goldman Sachs: How long is the bear market, the current valuation is limited in upward space

Source: Wall Street Insights

Goldman Sachs warns that bear market rallies are the norm and uncertainty dominates market movements.

Over the past two weeks, U.S. stocks have rebounded sharply, completely recouping all the losses since April 2nd. Peter Oppenheimer, an analyst at Goldman Sachs, recently stated in his research report that the recent sharp rebound in the stock market may just be a typical bear market rally phenomenon, and the current market environment poses a dilemma for stock investors.

Oppenheimer believes that the biggest driving force in the current market is still uncertainty, and investors have not truly taken a bullish or bearish stance on the market:

"The asymmetry of stock investment is poor. Sharp rallies in a bear market are the norm, not the exception."

"If the U.S. tariff policies are quickly revoked and cause almost no lasting economic damage, this indeed indicates that the downside risks are limited. But at the current valuation levels, the upside potential is also limited."

This market environment makes investment extremely difficult, and decision-making is trapped by ambiguous headlines. Market participants must choose between chasing the weakening rally and risking exiting too late, or completely missing out on another round of squeezing upward movements.

The tricky market environment forces investors to "buy with a pinch of the nose"

Many investors were forced to sell risky assets when the tariff outlook was uncertain in early April, but now they are buying during the rebound, and few investors have enough exposure to fully benefit from this performance.

Charlie McElligott, a cross-asset strategist at Nomura Securities, described the current situation as "This is a repulsive stock trade, and it's a situation that no one wants."

McElligott confirmed in a report that the phenomenon of "being forced to buy back exposure with a pinch of the nose" is playing out in stock index options, "even though most investors are averse to the future macro growth outlook."

Historical data shows that the rally may be approaching its limit

Judging from the data, as one of the most violent intra-month rallies in April in history, this rally may have exhausted its upward space.

According to media statistics, since 1980, global stock markets have experienced several bear market rallies, lasting an average of 44 days with an increase of 14%. Although the decline in global stock markets this year cannot be officially called a bear market yet, prices have risen by 18% from the intraday low on April 7th.

Peter Tchir, a macro strategist at Academy Securities, said:

"Interest rates and risky assets will continue to be driven by news headlines. Policies and transactions will alternately drive the market."

Investor sentiment and positioning have become crowded

John Marshall, a managing director at Goldman Sachs, wrote in another report that the financing spread - which measures the demand for long positions through equity derivatives such as swaps, options, and futures - has decoupled from the recent rise in the stock market. "This indicates that macro investors have reduced their equity exposure during the recent strength."

He, Marshall, expects that this week will be particularly volatile because the Federal Reserve meeting will be held this week, and "comments regarding June/July will be particularly important" at that time.

The buying by systematic investors is steadily increasing, which provides support for the rally. Goldman Sachs traders pointed out that the buying by systematic macro investors climbed to $51 billion last week and is expected to buy $57 billion this week.

"The total scale of purchases is not negligible, but it's not that large either, because if the signal flips quickly, it will reduce the immediate speed of capital flows, and the volatility environment is higher than before."

Other buying flows that have supported the rally during this period can be said to look more strained. JPMorgan Chase's tactical position monitor is currently in a neutral state, and the weekly change shows "a modest increase in positions."

The leverage ratio of hedge funds has rebounded month-on-month and is currently at the 96th percentile in the long term. At the same time, retail investors continue to increase their risk exposure.

John Schlegel, the head of JPMorgan Chase's positioning intelligence team, said:

"Since 2017, retail investors have had the strongest buying month in our data, and they are buying both individual stocks and ETFs at the same time."

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