The market's volatile swing are clearly too much for the central banker-incubating hedge fund known as Goldman Sachs, because just three days after Goldman said there has "never been a better time to buy S&P calls", when it said that "our GS-EQMOVE model estimates there is a 21% probability of a 5% up-move over the next month based on the current levels of S&P 500 Free Cash Flow yield, Return on Equity, ISM new orders and US Capacity Utilization"...
... moments ago the same Goldman announced that:
"the recent relief rally might be short-lived, especially with oil prices now at the upper end of our commodities team's forecast range for 1H 2016."
and adding that "we make no changes to our asset allocation at this stage as the relief rally has been too fast, in our view. We still do not feel comfortable taking more risk in equities until valuation or growth becomes more attractive."
Gartman flip-flopping within 3 days is normal, but Goldman? As for the "relief rally" being short-lived, it might be even shorter if Goldman's various divisions for some reason are unable to communicate with each other on how to best fleece muppets.
This is what else Goldman thinks in its latest "recommendation":
We make no changes to our asset allocation at this stage as the relief rally has been too fast, in our view. We still do not feel comfortable taking more risk in equities until valuation or growth becomes more attractive. Although we believe the market has been too pessimistic, we think a key driver of the relief has been higher oil prices. With oil at the upper end of our commodities team's forecast range for 1H 2016, it could drive further volatility as we do not believe oil weakness is necessarily over. We still believe credit remains attractive, particularly in Europe, where further ECB easing and good credit fundamentals remain supportive. Although US high yield has rallied recently, over the near term we remain Neutral US HY within credit. Despite seeing fundamental value in US HY spread levels, downside risk to oil makes us tactically cautious (see Global Markets Daily: Oil and HY redux, March 8, 2016). We remain Underweight bonds given the relatively low level of yields, potential for reflation, and our economists' expectation that the Fed rate hike cycle continues in June. We retain our relative preference for German Bunds over US Treasuries as policy divergence should play out over the coming months and drive the Treasury-Bund rate differential significantly wider.
Some more observations:
Volatility potential in a central bank filled month…should not be too unfamiliar given past movesThe ECB meets this Thursday (March 10), with the BoJ and Fed meeting next week.... Measuring how frequent extreme asset price movements have been in the past, the figure on the left below plots the average number of days over the prior 12 months with return moves (positive or negative) of 3 standard deviations or more by asset class, using rolling 1-year standard deviations. Since 1986, no period besides 2008-09 has had a larger number of relatively extreme asset price movements than we have experienced recently. This has been particularly true for the 10-year government bond and FX markets.
The figure on the right breaks down extreme movements by region by taking averages of 3-SD return days in Europe and the US across equity, 10y bonds, and IG and HY credit. We find that, of late, large asset price movements in Europe have become more prevalent than in the US, which is somewhat unsurprising given the higher volatility of those markets. EUR/USD has seen significant movements around the period of QE (both in the US and Europe) as policy drove near-term rate differentials and currency moves.
Notably, assets moving from a low- to high-vol regime are most likely to have a large number of 3-SD return days, as relatively extreme movements are easier to achieve when trailing vol is low, but these extreme days then contribute to raising realized vol. Thus, a decrease in a large number of 3-SD return days may actually signal a transition has occurred from a low- to a higher-volatility regime. We believe we will remain in a high-volatility regime, with no particular asset being immune, until a combination of policy, oil prices and growth stabilise.
How the ECB plays into this:
In our view, before the ECB may still be too early to enter the front end of the European equity vol curve. Should the ECB meet expectations or surprise, it is likely that short-dated equity vol may come down further, which we think could present an opportunity to go long shorter-dated equity vol in Europe.
Since it is safe to say the ECB massively disappointed, it is now time to play short-dated equity vol, which once again has a green light to surge higher. Unless of course, one is concerned about the Squid's dodecatuple reverse psychology, best demonstrated by that FX scourge Robin Brooks who "doubled down" in the ECB announcement, only to leave his clients crushed, in which case the S&P is about to break out to record highs.