According to a Friday note, investors should expect a 7% rally in the US stock market next week as quarter-end trades among investment portfolios lead to a buying spree.
When the stock market sees big moves in the same direction, rebalancing trades can have an outsized impact. The S&P 500 is down 20% year-to-date and nearly all stocks are down.
When the stock market is low, the rebalance trades can have an outsized impact. The current market depth is about 5 times lower than the average.
Since equity markets have been down over the past month, quarter and six-month periods, next week's rebalance is important. The market is oversold, cash balances are high, and recent market shorting activity is not seen since 2008.
The bank said that any up move in the stock market next week would be reinforced by quant trading funds.
The scenario has already been played out. The stock market experienced a rally in the last week of March when it was down 10%. When the market was down 10% at the end of May, it had a rally of 7% heading into the month end.
Heading into the end of the second-quarter, the current setup is the same as it has been in the past.
"Rebalances across all three lookback windows would reinforce and, based on historical regression, would imply a 7% move up in the equity market next week," he stated.
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