• Goldman Sachs’ trading desk expects stock markets to hit record highs over the next four weeks, followed by a downturn.
• An environment of low volatility and corporate buybacks are the reasons for Goldman’s optimistic outlook through mid-September.
• “We just witnessed one of the largest and fastest unwindings I have ever seen,” wrote Goldman’s Scott Rubner.

Investors should expect new record highs on the stock markets over the next four weeks, but should also be prepared for sell-offs.

This was stated in a statement by Goldman Sachs’ trading department, headed by Managing Director Scott Rubner, on Monday.

According to Rubner, the stock market is entering a “very positive 4-week equity trading window,” which suggests that “the pain trade for equities is higher.”

“The global two-week holiday began at 4 p.m. on Friday, setting a high bar for anything from bearish sentiment at the beach to a Labor Day barbecue,” Rubner said, stressing that low-volatility markets, such as those common in the weeks following the end of summer, are usually bullish for stock prices.

This new environment of low volatility in equity markets follows a historic 62 percent decline in the CBOE Volatility Index, the largest 9-day drop in Wall Street’s fear barometer ever recorded.

“We just saw one of the biggest and fastest price declines I’ve ever seen,” Rubner said, suggesting that professional trend followers who were driven out of the stock market during the sell-off in early August are now likely to go back into buying mode.

Other stock buyers in the coming weeks include companies that have approved share buyback programs.

According to Rubner, a lock-up period will begin on September 13 for about 50 percent of companies, so there will be numerous share purchases by then.

“The August-September window for corporate buybacks is historically strong. This two-month period is the second best of the year, with 20.7 percent of buybacks,” Rubner said, adding that the bank expects about $1 trillion worth of share buybacks to be conducted this year.

With the S&P 500 less than 1.4 percent below its record high, it won’t take much to push the index to record highs in the short term.

When should stocks be sold?

Although Rubner is optimistic, he still expects volatile stock markets and is not so sure whether there will be further price gains after September 16.

“I’m optimistic until September 16th. Then the season changes. The second half of September is the WORST TWO-WEEK TRADING PERIOD of the year. I’m not going to stick around,” said Rubner.

Rubner’s call is significant because he made a pinpoint prediction for the stock market in early July. He said stock prices would rise sharply in the first two weeks of July before a period of volatility in the second half of the month – and that is exactly what happened.

“The second half of September will be a difficult trading environment (especially before the elections),” said Rubner.

When should you buy back?

Although Rubner expects a steep rise in share prices over the next four weeks, followed by a period of negative volatility in the second half of September, he still believes that the stock market will end the year at record highs.

“SPX $6,000 – new highs in the fourth quarter, led by November and December,” Rubner said, adding that a record $7.3 trillion will flow from U.S. money market funds into stocks and bonds following the U.S. elections in early November.

A rise in the S&P 500 to 6,000 represents a potential upside of 7% from current levels.