I've been thinking about the market a lot over the last couple of weeks. Not because I have nothing else to do, but because I am actively involved in it. My investments, my superannuation, my family's goals and the things we want to do, and the fact that I run a wealth management firm, I can't get away from it. And frankly, I love it. But man, it's a noisy place - a lot of bullsh*t too. In my readings over the last week, a few things gave caught my eye, and I wanted to share them with you today - apologies in advance for all the charts - you know how much I love them.
The bulls and bears are at it at the moment, and the bears are making a lot of noise right now. Do you remember what was going on back in February of 2021, small speculators were going bananas. This time, it's not small options traders that have panicked. And it's not FOMO that's causing it. Rather, it's the largest traders in the market, and they're buying protection against a crash at a pace unlike anything the market has ever seen.
This is the craziest chart I've seen in a while. Thanks to Sentiment Trader, it shows the amount the net dollar value of premiums that institutional traders spent on buying calls to open minus buying puts to open. The lower the blue line, the more they spent on puts. As we can see from the chart, it has plunged to a record, far beyond anything we've seen in 22 years.
Looking at this differently, here's the same chart with option trading as a percentage of the US stock market capitalization. Last time we saw this level of activity during the GFC, and after a volatile 5 months, the S&P 500 fell a further 20% to bottom out on 9 March 2009. Interestingly, at the bottom of the market in March of 2009, we still had a large number of net speculative option premiums.
There are a number of reasons why this may be the case, but whatever the explanations, the data is clear - institutional traders are in a mad scramble for protection right now.
This one from Bank of America (BofA) was super interesting. Historically, most bear markets needed rate cuts to sustainably bottom (and in at least a few instances needed a lot of rate cuts). Something to be mindful of when you consider that the Fed is still talking up further rate hikes, and is likely still a long way off pausing let alone pivoting to cuts. So before you get too excited and short the market, just remind yourself why central banks are raising rates. History also tells us that recessions don't happen during the rate hike cycle, rather, when rates peak. Central banks then begin cutting rates to restabilize the economy.
This is what everyone is focussed on right now. The direction of that green line on the far right hand side of the below chart I put together. The direction of that line will indeed define the market regime going forward (at least in the short-term anyway). Either this line breaks out of the top blue line, or it breaks down below the bottom blue line to make new lows. There is of course, a third option. The market does break out and rally before it dips back down to the bottom - just to add to the suspense.
I feel like everyone is uber bearish right now. Consumer and investor sentiment, as we've discussed in the past, is in the dumpster right now. Yet, their actions don't align with how they're telling us they feel. Inflation, rising rates, central bank intervention, falling stock and property prices are the narrative. You can't argue with that.
Yet at the same time, the US jobless claims fell for a fourth consecutive week to a 3-month low. And corporate earnings continue to remain quite resilient. In fact, corporate America grew their earnings by 6.3% for the second quarter, with 75% of companies beating bottom-line expectations. Does this sound like a recession to you? During a recession, the average decline in earnings is 21.3% as can be seen by the chart below.
Is it just me or does it feels like the market is getting is just getting crazier and crazier. The range of outcomes are so wide, and anything is possible. It wouldn't surprise me if we make new highs by the end of the year, and equally it would surprise me if we made new lows.
My co-host Matt Rigby and I talk more about this and we take a deep dive into Aussie property in last week's The Wide Lens podcast.
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