- Equities continue to come under stress as evidenced by the soaring cost of bearish “put” options.
- Bearish put options are also at their highest levels since the pandemic crash of 2020, although over the past five years, such a phenomenon has also dovetailed with stock market bottoms.
It’s important to stay positive, but even the most bullish investors are showing signs of fatigue, at least according to the options markets and ETF outflows.
Equities continue to come under stress as evidenced by the soaring cost of bearish “put” options (the option to sell at a specific price) and higher “insurance costs” are just another worry to add to an ever-increasing list of things to be concerned about as the S&P 500 flirts with its lowest levels in almost a year.
Despite draconian lockdowns, China’s coronavirus cases are surging as the death toll mounts given suspect Chinese vaccine efficacy, low rates of vaccination and a lack of herd immunity increasing concerns that a dramatic slowdown in the world’s second largest economy could take down the rest of the global economy with it.
Strong earnings have done little to provide investors with relief, as markets tend to trade based on the outlook, not on the past.
Bearish put options are also at their highest levels since the pandemic crash of 2020, although over the past five years, such a phenomenon has also dovetailed with stock market bottoms.
Yet given the rich valuations fueled by the unprecedented flood of liquidity from central banks, it would be a brave soul to call a bottom on stocks.
For many investors, the unimaginable prospect of a hard landing for China’s economy is weighing on sentiment and providing a possible headwind for equities, rates and commodities – China’s economy crashing does no one any favors.
However, market sentiment remains heavily conflicted, the Cboe Volatility Index, a gauge of the cost of S&P 500 options hit a high of 31.60 at one stage before retracing.
Some investors believe that the light positioning (no strong bets in either direction) and negative sentiment, set the stage for a strong rebound in the stock market, with JPMorgan Chase’s Marko Kolvanic suggesting that equities are likely to stage a rally in the coming days.
Kolvanic points to companies emerging from a share buyback blackout and funds shifting money from fixed income after April’s equity selloff to return to present asset-allocation levels by the end of this month.
There may be some merit to this view.
Funds have been withdrawing billions of dollars out of Chinese assets, given their uncertain outlook, and fixed income has been hammered.
