Sell S&P 500 in ‘Every Scenario’ Looms as Rally Is Overheating

Even a slight pushback from the Federal Reserve on interest-rate cuts could unravel the relentless stock rally since late October.

Equity markets in Europe and the US look stretched on every front: flows, momentum and technical levels — leaving little headroom if the message from Chair Jerome Powell disappoints. With the S&P 500 just 3% short of a record and the Euro Stoxx 50 Index near its highest level since 2001, the stakes haven’t been this elevated before a Fed meeting since the rates pause in July.

A speedy switch from short-to-long equities by commodity trading advisers, who usually trade on market momentum, has been a major factor behind the $4.6 trillion rally in US stocks since Oct. 27. The shift has now left CTAs sitting on a $106 billion in long bets, which Goldman Sachs Group Inc. says leaves them more inclined to sell, rather than buy.

“We have this cohort modeled to sell S&P 500 in every scenario over the next week,” Goldman’s derivatives and flow specialist Cullen Morgan wrote in a note to clients. It follows a warning from his colleagues last week that dangerously high optimism on stocks means there are “no longer any bears left.”