Goldman Sachs warns the stock market will “crash upward”; the tech stocks rally isn’t over yet

In recent weeks, the U.S. stock market has continued to rally. Goldman Sachs has observed a volatility dynamic that has only occurred four times in history, warning that the stock market is set to “crash upward.” Based on Goldman’s data analysis, after this phenomenon appears, the stock market typically shows an upward trend over the following month.

Stock prices keep making new highs, but implied volatility doesn’t fall

Although the S&P 500 has risen by as much as 7% since mid-April and the index repeatedly hits new highs, implied volatility has not declined in tandem with the market’s advance. The VIX has remained relatively steady since it fell below 18. This is mainly driven by market participants actively trading call options on popular, strong-performing stocks; meanwhile, some traders assess that current broad-market volatility is lower than the implied volatility seen in hot sectors such as technology and semiconductors, prompting them to carry out broad market hedging. The combination of buy-side momentum and demand for hedging positions provides downside support for volatility.

Index and call options show a positive correlation—rare record in a decade—stocks likely to crash upward

According to Goldman’s data analysis, the current market trading structure has developed an extremely rare dynamic: the Nasdaq 100’s one-month call option price correlation (Correlation) is positive. This has only occurred the fourth time in the past decade. The correlation value is currently around 0.4, the highest level since January 2017. In the report, Goldman analyst Brian Garrett refers to this phenomenon as an “Up Crash,” and notes that while some market participants view it as a signal that long positions are about to be closed, the current data structure does not support that exit thesis.

Historical return data and the risk of a potential volatility reversal

Looking back at the three prior periods with this positive correlation, the stock market’s average return over the following month was 2.7%, higher than the 1.5% single-month historical average in the study period. In the similar scenario of 2017, the VIX had previously reached a historical low of 8.56, while the S&P 500 and the Nasdaq indices recorded annual gains of 20% and nearly 32%, respectively. However, historical data also points to potential risks: after the extremely low volatility environment in 2017, a volatility spike occurred in the first quarter of 2018, when the VIX surged to 50, leading to liquidations for some financial products that sold volatility. This suggests that when assessing potential upside room, one must still watch for the possibility of a future volatility reversal.

This article, Goldman Sachs warns that the stock market will “crash upward,” and the tech stocks’ surge is not over yet, first appeared on Chain News ABMedia.