Authored by Goldman flow trader Scott Rubner

The #1 incoming question to hit my inbox during this week: “when (exactly) “does” the equity market sell off during September?” It’s time for a thread.

What is current institutional investor consensus about a potential equity market correction, that is for a trade? 10 points on why investors are bearish for the last two weeks of September. 

1. Potential Record Monthly Equity Issuance – This is the most important market dynamic for the month of September. Can investors absorb record issuance? This started at the close last night. It is still going this morning. GS trading floor is on fire. We went live on over 10 deals yesterday (between ipos, follow ons, blocks) and street wide in the US over $6bn of paper hit the market in different forms (not including blocks this mornings). Also had $5bn of issuance in Europe yesterday. September is shaping up to be one of the busiest months in history. 

2. Lock-up, PE, Conglomerate Supply (continued) – Same point as above. We expect a significant number of monetization blocks coming to market. 

3. Corporate Buyback Blackout Window – September 20th. As of today, we estimate that 15% of the S&P 500 is in their closed window. This is a big deal. Corporates are expected to be the largest buyer of stocks in 2H and corporates have significantly offset issuance. See FAAMNG massive outperformance Wednesday. 

4. S&P 500 Seasonals – September 16th – This is the highest point of the day-by-day peak for September, before closing lower on the month. 

5. Index Option Expiration and GAMMA roll off – September 17th –  We estimate that dealers are long $4.67 Billion worth of gamma, muting a potential move prior to expiry. This is a big number. This long gamma position gets significantly reduced during September monthly option expiry. The past 4 monthly option expiry dates have created some added volatility as the long dealer gamma rolls off. 

6. Pension Fund Quarter-End Rebalancing – September 30th – We are roughly 2 weeks away from when “Global Wall Street” inboxes are filled with quarter-end supply estimates. These are expected to be very large. This will be the time that pension funds finally go nearly fully funded (98% funded) and immunize portfolios. 

7. USA 60 – 40 portfolio Rebalancing – September 30th – I have seen estimates that US 60-40 portfolios have run to 63-65% in equities vs. 37%-35% in fixed income during the quarter. According to many mandates, these are typically adjusted near quarter end. This would add to quarter-end supply estimates. 

8. September Mutual Fund year-end – September 30th – 14% of mutual fund year end is at the end of the quarter. No direction clear direction of path here, but added single stock volatility to close out the quarter before “year-end statements” go out. 

9. Changes to Capital Gains Tax Rates – any knee-jerk selling or pause of retail buying on the headlines?.  TBD. There has been no move lower in GS high capital gains basket {GSCBCAPG Index}. This is one of the most important flow-of-funds dynamics for Q4 and may impact the path of traditional December moves. I will be aggressively tracking this once we get more details on any potential changes in rates.

10. Forced hedging into the FOMC September Event – September 22. Look this barely made the cut. Known events are usually not the driving factor, but it can add into volatility into the event post expiry. I think institutional investors will hedge taper fears with put spreads and buying vol.