The U.S. stock market continued to plunge today after Goldman Sachs reported bleak quarterly corporate earnings, which accelerated the downward trend for stocks as financial and economic results disappoint. According to Goldman Sachs flow trader Scott Rubner, the nail-biting sentiment is fast spreading across the market after several indexes started to tumble last week and closed on negative again today. The veteran trader forecasts more volatility this week as liquidity gets removed from the market. During Goldman’s trading desk, analysts answered some of the most asked questions and shared some indicators showing that more losses are coming. The analysts argued that the current market consensus remains bearish given that equities cannot sustainably hold a rally during the day, and most gains fade away when the market’s about to close.
“The sell the Rally mode is still in place,” they noted. Goldman also explained why indexes have not been able to hold gains over the past few weeks. Of course, the stock market crash has just begun, but the fact that stocks are not being able to retain their gains and recover means that something is systematically broken in the market, and a reversal, at this point, seems unlikely. First, the Wall Street bank notes that as the sell-off intensifies, the equity supply is much more elevated than investors’ demand for stocks. Goldman’s estimates point out that $15.8 billion of selling happened last Thursday alone, and at least $69.9 billion will be removed from the market by the end of the week.
Adding more turbulence to that scenario, corporate earnings have been quite disappointing, which is inflaming the correction in some sectors and triggering a crash in others. The sharp losses are turning sentiment from negative to “panic-y”. “Since 1987, the Bull vs. Bear index has been at .45, and it is currently at .44. This has only happened 51 times out of 1,799 readings or 2.8% of times,” he said. Rubner says that another catalyst that can potentially spark another sell-off is CNBC’s “Markets in Turmoil” warning. If it sounds the alarm, a broader crash can be set off pretty much overnight, considering that the last time CNBC’s financial experts shared their prediction of an imminent collapse, the downturn followed right away, so that’s one key indicator investors are paying close attention to.
Additionally, as the global economy starts to slow down again and supply chains seem to be grinding to a halt, inflows from foreign countries to U.S. markets have also been compromised, with earnings reports signaling that major global industries are faltering. What’s more, according to Goldman Sachs’ chief U.S. equity strategist, David Kostin, the “substantial” disconnect in the U.S. tech sector is going to bring about a lot more chaos over the next few days. The tech selloff is inflating the market with unprofitable stocks. That has already pushed the Nasdaq into correction territory and several other indexes to the edge of a meltdown.
“The single greatest mispricing in the U.S. equity market is between companies that have high expected revenue growth but low or negative margins, and on the other hand high growth companies with positive or very significantly positive margins. That gap has adjusted dramatically in the last year,” Kostin said. In other words, Kostin believes that tech firms that have had “huge returns but produce little profit are going to continue to be sold by investors after a period of being highly sought after,” and he says that trend will accelerate as the tech bubble deflates.
“That’s a big issue, and so the gap between those two, I’d say, is the single biggest topic of conversation with clients. You’ve had a huge derating of the fast expected revenue growth companies that have low margins, and the argument is probably that there is more to go in that readjustment.” Derating is the term used to define the correction or crash triggered when investors start to rethink the price or value of any given asset, especially when there’s growing uncertainty regarding its prospects.
As more and more traders take off their rose-colored glasses to see reality as it is, bearish sentiment is making a comeback, and that’s a huge sign that a bigger meltdown is approaching. We’re currently witnessing the last stages of a superbubble that can burst at any time – and when it does, stocks will face a brutal crash, to the tune of 80 to 90 percent in the most overvalued sectors. The checklist for a catastrophic bubble burst is now complete, and the countdown for a financial disaster like no other has begun.
https://www.epiceconomist.com
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