It's time to prepare for a sell-off in U.S. stocks - Bloomberg

2023-07-30 16:10:00

While the bullish U.S. stock market has created a fearless atmosphere among traders right now, some strategists are gearing up for the potential for a sell-off.

The S&P 500 is up 19% year-to-date, and wait-and-see investors are back in the market. Traders’ exposure to equities is at historically high levels, according to an analysis by Deutsche Bank.

It seems that few traders are concerned about market movements and are thinking of hedging. Bank of America (BofA) strategists said in a report that buying protection against a stock market crash in the options market is “the cheapest you’ve ever seen.” Call option volumes have significantly outperformed put options this month, the widest gap since December 2021.

But there are reasons to be concerned. The US Fed, which has continued to raise interest rates rapidly in response to high inflation, is now aiming to achieve a soft landing. Few have ever fully accomplished the arduous task of curbing inflation without incurring a recession. Additionally, August and September are often the two worst months of the year for the S&P 500.

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“Our contrarian antennae are a bit reactive given the bullish sentiment and seasonal weakness,” said Jeffrey Hirsch, editor of the Stock Traders Almanac, adding, “Bears were on the sidelines. is now chasing this momentum, as well as all investors who have a fear of missing out (FOMO) on board, which means this rally is nearing a halt.” .

Many expected the S&P 500 to fall and then recover at the beginning of the year, but in reality it has defied that consensus and continues to rise. In response, bears such as Piper Sandler’s Michael Kantrowitz and Morgan Stanley’s Mike Wilson are adjusting their stances.

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The S&P 500 was on a monthly rally in July, which would mark a fifth straight month of highs. However, the upward momentum seems to be growing. The put-to-call ratio on the Chicago Board Options Exchange (CBOE) is at its lowest level in more than a year. Historically, that suggests stocks will be broadly flat over the next three months, according to data compiled by Goldman Sachs Group Inc.

In addition, seasonal factors could act as additional headwinds. Over the past 30 years, August and September have been the worst performances of the year for the S&P 500, with August down 0.2% and September down 0.4%.