Goldman Sachs: Trump's "Super Week" has ended, and the U.S. stock market will enter a rotation market

The results of the U.S. presidential election were revealed last week, which was widely expected to be a closely contested battle, but it ended with a significant victory for former President Trump and the Republican Party. At the same time, data showed that the stock market's performance also exceeded expectations, with the Russell Index rising 8.6%, the Nasdaq up 5.4%, and the S&P up 4.6%.

Following this shocking buying frenzy, Goldman Sachs trader Mike Washington stated that with the election, the Federal Reserve, and the Bank of England each cutting rates by 25 basis points, the yield (the 10-year U.S. Treasury yield fell 7 basis points to 4.30% within a week) has shown volatility and a pullback, and investor fatigue has begun to emerge.

However, despite this, Washington remains optimistic, predicting that rotation pressure will continue to be a significant feature of the market as investors allocate funds to smaller companies and seek opportunities in cyclical/inflation themes.

Scott Rubner, an expert in fund flows at Goldman Sachs, indicated that fund inflows remain positive, and the overall market conditions remain optimistic, as corporate buybacks remain strong, hedge funds are re-leveraging, and hedging positions are decreasing (with the VIX index at 14.94). From the perspective of fund flows, long-term investors net bought $12 billion last week, while hedge fund flows remained balanced.

In terms of buying preferences, the sectors with the highest buying inclination are: utilities, financials, and real estate investment trusts, macro products, and technology. The only sector that Goldman traders showed a slight inclination to sell was healthcare. Data shows that the best-performing sectors last week included: Bitcoin, retail favorites, stocks that performed well over the past 12 months, software stocks, and regional bank stocks, all rising over 10%. The worst-performing sectors included: weight loss drugs down 2% and renewable energy down 1%.

In the derivatives market, due to trading primarily focused on chasing call options driving up the VIX, the S&P call skew reached its flattest level in the past year last Friday, with volatility trading reflecting "spot up, volatility up."

While the market is rising, some Goldman clients continue to cash in on the gains in the financial sector from the election trades, as financial stocks previously experienced unprecedented buying, along with a surge in SPY call options and spread options trading. Additionally, the trading volume of Tesla surged, with trading contracts exceeding 4.8 million (the highest level since 2021).

A closer look at Goldman Sachs' prime brokerage business reveals market enthusiasm, with a significant increase in trading activity on the bank's prime brokerage book, marking the highest increase since September 2022. Last week, the actual buying volume in U.S. stocks was the second highest in the past five years, second only to March 2023.

Regarding hedge funds, after a sharp deleveraging the week before the election, hedge funds are re-leveraging and have reduced macro hedging positions following the clarity of the election results. Although the total leverage of long/short funds trading U.S. stock fundamentals remains relatively low compared to the past year, their "net leverage" has risen at the fastest pace since November 2022, reaching a new high for the yearData shows that the performance of long-short funds is estimated to have risen by 2.37% between November 1 and November 7, with the total leverage ratio increasing to 187.0% and the net leverage ratio rising to 59.1%. Specifically, macro products (combined indices and ETFs) accounted for 70% of the net buying volume, driven by long buying and, to a lesser extent, short covering. Hedge funds reduced macro hedges after the U.S. elections, with net short positions in U.S.-listed ETFs seeing a 3.2% net covering, marking the largest weekly decline since mid-August, with the most significant covering in small-cap and large-cap stock ETFs. Additionally, individual stocks saw net buying for the sixth consecutive week, with long buying exceeding short selling.

Trading flows indicate a shift of funds towards consumer, financial, and TMT sectors, while defensive/high-dividend yield stocks such as consumer staples, real estate, utilities, and healthcare were net sold.

The financial sector was one of the best-performing sectors in the U.S. last week, with hedge funds net buying for three consecutive days (four out of five days), and long buying exceeding short selling. The nominal long buying volume for the U.S. financial sector last week was the highest since February 2021, with consumer finance, capital markets, and financial services being the sub-industries with the most net buying. However, year-to-date, the U.S. financial sector remains a net sold sector, with net allocation still well below the five-year average.

This enthusiasm is not only reflected in Goldman Sachs' prime brokerage business but has also spread to the futures market. Goldman Sachs' Robert Quinn wrote in the bank's "Weekly Overview" that the record holdings of non-market maker S&P futures have further increased.

Overall, Goldman Sachs believes that "this week's price performance has well supported the overall existing net long positions and has further increased due to new positions." Accordingly, almost everyone in the market who could hold long positions has now taken action