I call BS on Goldman's stock-market call

In a "stunning" display of leadership, Goldman Sachs last week downgraded equities to "neutral" over the next three months citing "a chance of temporary sell off in line with what we saw last summer."

Great. So what does this really mean?

Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

Webster's defines neutral as "not supporting either side of an argument." And, with the "chance of a temporary selloff" looming, then I guess Goldman is really just covering its bases.

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To confuse investors even more, they said that "the near-term risk/reward profile for stocks was less attractive, even as they re-iterated a "strong conviction" that stocks were the best-positioned class over the next year."

The data have done nothing but improve, earnings have only gotten better, Europe and Asia are making great strides … In fact, last night, China broke out and up through its 200-day moving average, showing a decisive move forward. So, what exactly is less attractive? Do they think that the market values are ahead of fundamentals? Are they now saying that the Federal Reserve has fueled this advance and with policy uncertainty, the party is over?

The call lacked some clarity, leaving investors and traders to wonder: Are they suggesting that investors sit tight, sell everything and raise cash? Or, just not put any more cash to work at current levels? The note had a dramatic headline but the market had zero reaction. We were already down some 125 points on Friday when the call hit and the market yawned. Not impressed with such a benign, melodramatic headline.

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The swing from the May 2013 high of 1672 to the June 2013 low of 1577 translated into a 6-percent drop and by early August 2013 we were trading back at 1689. So, over that three-month period, the market actually ended 1 percent higher. The same 6-percent drop today would take the market to 1865 on the S&P 500…. Um … I don't see it.

Look at what happens when the market attempts to back off: It is met with plenty of demand right here in line at the 1945-ish level. But if it should breach that level, then look for it test 1925 — the equivalent of a 3-percent pullback off the most recent highs. Is a 3-percent pullback really a reason to be neutral? For many, it equals opportunity.

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In order for the market to sell off 6 percent or more over the next 3 months, we will have to see a stall out — if not reversal — in U.S. macro data. That is not likely to happen. This is a big week — lots of macro data and some 150 + earnings reports due out. To date, we have seen some 75 percent of earnings beat expectations with some 68 percent of them crediting growing top-line revenues – a vast improvement over prior quarterly reports. Will we see this latest trend implode this week? Not so much.

GDP is due out on Wed. Expectations of a 3 percent annual growth rate are well above the first-quarter final – minus-2.9 percent. Remember, this is the first of three reads on second-quarter GDP. My sense is that the market is prepared for a read of +2.5 percent or greater. The July jobs report is due on Friday – expectation of +230K jobs to be created and what will that say about unemployment? We are already at 6.1 percent — any move lower could take us into the 5-percent range — and this will cause all kinds of emotions AND Fed reactions. But didn't the Fed want this to happen? Will it cause the Fed to hint at rising rates sooner than expected and if so, will that be the catalyst that Goldman is referring to? Traders/investors will be trying to read between the lines — looking for any hint that with this "strong economy," rates must be getting ready to move higher. But this is not what I think we will get.

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My sense is that, despite all of the improvements being made in the macro data, the Fed will remain accommodative until late spring of 2015. Look, even Goldman said that they do not believe rates will go higher prior to the third quarter of 2015, which is still behind the consensus call for an initial move to happen in late spring/early summer. So what's the fuss? Any real strength in the data will only support the idea that the U.S. recovery is alive and well — and a stronger economy would welcome and support a "normalization" of rates. So, any move in rates should not be a reason to sell — unless of course you don't believe the data — and this my friends is what separates the men from the boys.

I continue to believe that the second half of the year will surprise us — the turnaround that we have all been waiting for is now on the doorstep. For the long-term investor, any weakness is an opportunity to add to positions — and I continue to think that there are a lot of investment managers who are being patient. That's why I think that any pullback will be muted.

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Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.

Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.