Depending on who you listen to, September is either ripe for a continuation of the record rally in U.S. equities or a potential minefield thanks to risks emanating from, among other things, i) a fresh escalation in the trade war with China, ii) the likelihood of renewed turmoil in the Italian bond market due to a budget battle between the populist government and Brussels, iii) Mueller risk, iv) a dollar that starts to rise again after taking a mid-August breather.

Dollar

(Bloomberg)

Obviously, we’ve spent a ton of time talking about each and every one of those risks.

Read more on the minefield

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But as far as the potential for a September rally is concerned, one argument is that the buy-side has some catching up to do and in the event that effort conspires with a reinvigoration in the long Growth/Momentum trade, there’s scope for further upside. Nomura’s Charlie McElligott has been pounding the table on this for quite a while.

“As discussed here for a few months, the enormous underperformance within the Equities fund universe is now perversely driving this latest market ‘melt-up,’ after hedge funds just last week had reduced their Equities ‘Net Exposure’ to one-year lows, while both Hedge- and Mutual- funds had reduced their Beta to ‘Momentum Longs’ down to only the 10th percentile just three weeks ago”, McElligott wrote on August 27, adding that from mid-August, “equities funds have been forced back into the market in ‘grabby’ fashion—thus the absurd +4.1% return in Nomura’s ‘1Y Momentum’ factor, along with a huge leap for both Hedge- and Mutual- fund ‘Beta to SPX’ last week (HF’s to 93rd %ile / MF’s to 87th %ile) and general ‘grossing-up’ behavior by the end of the week.”

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