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The stock market is facing a ‘pain trade’ that suggests the latest rally will extend into April

NYSE trader

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  • The stock market has a knack for doing the opposite of what most people think it will do, and that’s what’s playing out right now.
  • Despite the bank failures and more interest rate hikes from the Fed, stocks are moving higher.
  • The rally could continue into April as many investors are caught offsides and buy, according to Goldman Sachs.

The ongoing stock market rally that began at the mid-October low is likely to extend into April as many investors are caught offsides by the bullish momentum.

The stock market has a knack for doing the opposite of what the consensus view says it will do, and that’s playing out right now after the S&P 500 surged 3% in March despite the second biggest bank failure in US history and an additional 25 basis-point interest rate hike from the Federal Reserve.

But Goldman Sachs’ Scott Rubner isn’t surprised by stocks rallying in the face of negative news because positioning data shows that hedge funds and retail investors are overly bearish, essentially fighting the ongoing rally.

“Current positioning is too short… if the macro were to improve, we think that the pain trade goes back to the upside. This is a change in tone,” Rubner told clients in a recent note.

And there’s a lot of firepower for the stock market to rally if tactical traders flip bullish, as Rubner suggests is possible.

According to the note, trend-following traders on Wall Street, also known as commodity trading advisers (CTAs), are currently betting about $26 billion that the S&P 500 will fall, representing the largest short position since October 2021.

But if momentum continues to flip to the upside, those traders could be forced to exit their short positions and flip their exposure to long equities, essentially adding fuel to the ongoing rally, according to various scenarios of Rubner’s trading model.

“It’s a green sweep for the S&P 500 with potential demand in six out of six scenarios. CTA equity demand is simply the most important chart of my deck. It is a great American BBQ party. You do not see this very often,” Rubner said, referring to the pain many cohorts of the trading community are going to experience if the stock market drifts higher.

And that overly bearish positioning gives Rubner confidence that the stock market will extend its rally into April.

“There is simply too much going on in the ‘macro’ to have a confident trading call, but I am bullish equities for April,” Rubner said.

Carson Group’s chief market strategist Ryan Detrick agrees with Rubner’s assessment, especially considering the fact that stocks are entering one of their best performing periods of the four-year Presidential cycle.

“Historically, the second quarter of a pre-election year is up a solid 4.8% on average and higher 72% of the time. Given the overall negative sentiment, an economy that continues to defy the skeptics, and this positive seasonality, we’d be open to a continuation of the rally off the October lows last year,” Detrick said in a note this week.

On top of that, Detrick highlighted that since 1950, the month of April in pre-election years saw gains 94% of the time.

“Why is April usually strong? It could be a combination of springtime buying, good riddance to winter, or putting tax refunds to work. But the bottom line is that this is something we’d rather know than ignore,” Detrick said. 

Read the original article on Business Insider
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