After Monday’s rather ugly session, you’d be forgiven for wondering what your options (no pun intended) are for hedging downside equity risk.
If we’d gotten a pullback with no attendant political upheaval, it might be easier to write Monday’s action off as a forgettable session that was probably long overdue anyway. That is, you might even call it “healthy.”
But Monday felt anything but “healthy.” There was nothing cathartic about it.
It didn’t feel like investors taking some off the table after a prolonged rally. Rather, it felt like a direct reaction to a risk-off event. And that’s the kind of move that could have legs.
The question now is whether this week’s central bank meetings and Friday’s NFP print will collectively argue the bull case or whether they will provide a policy/economic justification for further downside.
Well, if you’re interested in protecting your own downside, here’s a bit of useful color from Deutsche Bank.
Via Deutsche Bank
SPX 3M realized correlation is now near its 15-year lows, indicating an attractive environment for picking stocks. We expect the lower correlation environment to continue. Even with lower index implied volatility (partly driven down due to declining correlation), single stock options may be attractive in certain situations where select stocks have attractive downside or upside betas given the level of implied volatility (or option cost).
Select single stock options preferred as downside hedges over SPX or SPY. To position for downside over the next six months, there are many diverse stocks with higher beta levels per downside (90% of spot) 6M implied vols when compared with the SPX: ACN, ADM, BA, BDX, BK, BLK, CSCO, GE, GOOGL, ITW, MA, SBUX, SWK, YUM.
Downside beta vs. SPY per downside vol point show diverse representation across sectors
- Stocks with high downside beta per downside vol point show diverse sector representation (2 Consumer Discretionary, 1 Consumer Staples, 2 Financials, 1 Healthcare, 4 Industrials, 4 Technology)
- GE looks to have implied vol not much higher than SPY, while historically reacting more on moves over 1.5% down.
- CSCO has the highest downside beta/vol point ratio.
- Every downside candidate has lower 6M 90% IV/6M RV ratio compared to SPY
I think people are going to go full bull on the ISM manufacturing PMI. All the Fed surveys for each of the regions have been as good as they have for a long time. My personal guess is the small business optimism around the election probably has given it a short term bump. But then reality will sink in.