As we close out the month of July, an extraordinary pattern emerges in the stock market: everything has turned upside down. In this piece, we share our observations and break down what it means for investors.
The first thing we noticed was the Low Beta index starting to nosedive.
While we've seen frequent such episodes since 2022, the current one is both steeper and faster.
Momentum Flipped. The bigger the prior loser, the stronger the rebound in July.
The chart below shows that stocks in the bottom 5% of returns over the prior six months have gained 9.5% in the 30 days ending July 25.
Other factors have reversed too.
Small-cap value, long neglected, has suddenly emerged as a favorite.
Stocks with solid fundamentals and earnings outlook greatly underperformed in July.
Those typically favored during risk-on periods following a market crash are leading the pack.
fundamental, earnings and risk-on phase, respectively.
Our proprietary active signal has called for a 100% allocation to high-risk stocks since late June.
Note: proprietary active allocation signals;
when at 100% - calling for full allocation in high risk stocks; when at 0% - calling for zero allocation in high risk stocks;
risk is measured by a set of factors including but not limited to beta, quality and technicals.
The rise in Goldman Sachs' Speculative Trading Indicator has been one of sharpest increases on record.
Every component of Goldman’s Speculative Trading Indicator is elevated relative to history.
Penny stocks and stocks with extreme valuation multiples are in the 95th percentile, while unprofitable stocks sit at the 85th percentile.
There's a close relationship between Goldman Sachs' Speculative Trading Indicator and the performance of a basket of stocks popular with retail traders. The Retail Favorites basket has surged 50% since early April, boosted by social media sentiment.
July experienced one of the sharpest short squeeze on record.
Since early April, Goldman’s Most Short basket has surged over 60%, outperforming the equal-weighted S&P 500 by nearly 40 percentage points.
Despite that the broad stock market is making record highs,
the market breadth is extremely narrow now.
Historically, concentrated leadership is often the catalyst for broader, sustained rotation.
Call options now make up 61% of total option volume, the highest since 2021,
indicating increased risk appetite in the stock market.
Historically, sharp increases in speculative trading have signaled above-average near-term equity returns, but often at the cost of a higher risk of medium-term drawdowns.