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Goldman Sachs says conditions point to the stock market seeing a correction of 10% to 20% in the next few months.

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#1 Swiss Trader

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Posted 30 January 2018 - 04:45 AM



Add Goldman Sachs to the list of Wall Street firms growing increasingly skeptical about the stock market's record-setting run.

The firm's global equity strategy team weighed in Monday, noting that worldwide stock markets are off to their best start in more than 30 years. Their performance has been so strong, in fact, that both the S&P 500 and the MSCI World indexes have entered their longest period on record without a 5% correction.

That's likely to change in the next couple of months, however, and investors should be braced for the turmoil, Goldman says.



Goldman notes that its proprietary GS Risk Appetite indicator is close to its highest ever, which reflects a sharp increase in investor optimism. The firm also points out that the Cboe Volatility Index, or VIX, has been rising alongside the S&P 500, reflecting increased risks, since the two gauges usually trade inversely to each other.

Still, Goldman says the continuation of low core inflation and easy monetary policy suggests that any pullback will be short-lived and could even be a chance for bulls to increase positions.

"A correction of some kind seems a high probability in the coming months," Peter Oppenheimer, the chief global equity strategist at Goldman, wrote in a client note. "We do not believe that this would be prolonged or morph into a bear market, and so would see it as a buying opportunity."



The average bull-market correction — defined as a decline of 10% to 20% — has amounted to 13% over a four-month period and takes just four months to recover, according to Goldman data. As such, even after a correction in the first half of 2018, the S&P 500 still has a great chance to finish 2018 higher, the firm says.

The combination of Goldman's short-term skepticism and longer-term bullishness isn't necessarily unique to the firm. Bank of America Merrill Lynch's global investment strategy team has been sounding the alarm for months on investor overexuberance. The situation has gotten so drastic that BAML recently referred to the confluence of factors as a "non-stop euphoric cabaret."

Like Goldman, however, BAML says it will be largely constructive on stocks once this euphoria shakes out of current valuations. So with that outlook established the key question becomes, what can an investor do in the meantime to avoid being caught off-guard?

Goldman recommends the purchase of put spreads, which are used when a moderate decline in an underlying asset is expected. In a put spread, a trader buys a specific number of put contracts — probably on the S&P 500 in this scenario — while also selling the same number of puts at a lower strike price.

Using this method could save you some pain if a first-quarter downturn comes as Goldman, BAML and their Wall Street brethren expect. After all, even if the market finishes the year markedly higher, it's highly unlikely to move in a straight line.





#2 Swiss Trader

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Posted 30 January 2018 - 02:00 PM

Down we go!!!!!!!!yes.gif




Renaissance Technologies, the world’s most profitable hedge fund, said there’s a “significant" risk of a correction in prices and is preparing for possible market turbulence.

While accelerating global growth, corporate tax reform and a business-friendly administration in the U.S. have contributed to market gains, it’s not clear these factors justify current valuations, especially in light of sovereign debt levels, Ed Hubner, the quant firm’s head of risk control, wrote in a December letter sent to clients this month.

The best global economic growth in seven years has helped stoke a multi-year rally in stocks. The current S&P 500 Index’s price-to-earnings ratio of about 18.6, compared with about 11 in 2011, may be justified if volatility remains low and 30-year bonds hold below 3 percent, Hubner wrote in the letter seen by Bloomberg.

“However, with higher rates and more volatility a distinct possibility, there is a significant risk that asset prices will correct,” he said.

In addition, the downward technical pressure on the Cboe Volatility Index, or VIX, due to the growth of strategies that bet against market volatility, and lower correlations within the S&P 500, shouldn’t be confused with unshakable economic calm, Hubner said.

‘False Sense’

“While the fear of missing out may not be a concern for equity investors, increasing euphoria mixed with a bit of complacency certainly is,” he said. "Historically low levels of volatility may well have given investors a false sense of security in the nearly two years since the last market correction."

The firm’s Renaissance Institutional Equities Fund, known as RIEF, returned 15 percent last year, according to the letter, as the S&P 500 Index gained 19 percent. Jonathan Gasthalter, a spokesman for East Setauket, New York-based Renaissance, declined to comment.

Former military code-breaker Jim Simons founded Renaissance in the 1980s and ceded control of the firm to Peter Brown and Robert Mercer eight years ago. Mercer stepped down from his role as co-chief executive officer as of Jan. 1 on Simons’s suggestion, after concern that Mercer’s backing of Stephen Bannon and Breitbart News had hurt morale at the firm.

Read More: RenTech’s Jim Simons Suggested Mercer Step Back for Morale

Hubner also wrote in the letter that while equity prices have moved upward for many years, and technical and quantitative analysts say "trend is your friend," at some point trends reverse.

“While we cannot know when that will happen with the current markets, we are doing our best to prepare for what may be turbulence ahead,” he wrote.