Tuesday was the last Trade day of 2024, with the S&P 500 Index closing after four consecutive days of decline, marking the longest year-end drop since 1966, although it still performed strongly throughout the year. Goldman Sachs' top trader Brian Garrett stated in his last report for 2024 that the market performance in the last two weeks of the year greatly deviated from his original expectations.

Garrett pointed out that on December 16, the market expected a 1.25% volatility for the S&P 500 Index in the following two weeks. The 1.25% was derived from the pricing of Straddle Options. Straddle refers to simultaneously buying or selling the same symbol, with the same expiration date and the same strike price for both Call and Put options, which can reflect market expectations for future volatility.

However, since December 16, the actual average volatility of the S&P 500 Index,intraday tradingmeasured by the difference between the daily high and low points, was 1.35%. This indicates that the market's actual volatility exceeded theoptions pricingreflected expectations.

Garrett warned that short positions have recently started to increase,Technical aspectdominating the US stock market performance, market liquidity is under pressure, and awareness of risk management is on the rise (short positions have increased, net positions have decreased). Garrett indicated that while the US stock market performed quite calmly in the first year of Trump's first term, there are signs that the first year of his second term will be different, and it will not be so peaceful.

Therefore, the Goldman Sachs trading department has the following suggestions:

Focus on equal-weighted indexes rather than market-cap-weighted indexes.

Prefer mid-cap stocks over large-cap stocks.

Allocate some funds to Gold and use 6-month Options for market downside protection.

Pay attention to the volatility index VVIX, be cautious above 110. VVIX is the Indicator that measures the volatility of "VIX Options."

Focusmergers and acquisitions.The target, especially in areas outside the USA, considers the strengthening dollar.

Goldman Sachs' report also highlights several important points.

The SPX Options market in 2024 exhibits a new volatility pattern, which can be referred to as segmentation. The main characteristic of this phenomenon is that when risk events occur, market volatility rapidly increases but then quickly declines. Such a rapid rhythm of rises and falls has not been seen in the past three years. This is likely due to structural Index Gamma supply. If a prolonged period of weakness occurs in the future, the prices of these short-dated options may drop too quickly, thereby providing investors with better opportunities to Buy on dips.

Regarding the structural supply of Gamma, Garrett uses the last few days of December as an example to demonstrate that Gamma is extremely important. In the diagram below, the correlation between volatility and Gamma only became a point of interest about two years ago, and it has now become a key point to monitor daily.

The breadth of the market in December significantly declined. On about 70% of trading days in December, the number of declining stocks exceeded that of advancing stocks; however, the S&P 500 Index remained very resilient. Another way to analyze market breadth is to compare the returns of the equal-weight SPX and the Market Cap weighted SPX Index, which had a difference of up to 6% in 2024.

In 2024, although there was a surge in retail trading sentiment, the current frenzy of buying super large-cap Technology stocks has significantly cooled down, decreasing by about 75% from its peak. When these large Technology stocks show a slow grind up rather than a crash up, retail investors lose interest.

Garrett also discussed the cost issue of one-year at-the-money (ATM) Call and Put Options. Currently, the cost of one-year ATM Call Options is very high. Considering the impact of interest rates and dividends, buying a one-year SPX 5900 point Call Option, if it reaches Goldman Sachs' forecast of 6500 points for the S&P 500 by the end of 2025, the strike price's ROI is only about 20%.

Volatility Pressure Index. This is a customized volatility indicator by Goldman Sachs, which includes VIX volatility, ATM Options,Implied Volatilityvolatility skew, term structure, and several other factors. The index began to rise at the end of the year.

Changes in systematic capital positions. Recent market declines may trigger sell-offs from systematic funds such as trend-following and risk parity. According to Goldman Sachs' estimates, they have sold about 28 billion dollars of Global Equity in the past week, and could sell another 28 billion dollars in the next week.