They’re grabbing for upside. Or buying lottery tickets. Or they’re just keen to ride a wave which, through mid-week, had produced 26 new record highs for US equities since late June.
Sometimes, in never-ending stock melt-ups set against confusing macro backdrops, discretionary investors, reticent in the face of conflicting data and strong crosscurrents, under-capture and end up chasing the rally with calls.
Although systematic investor cohorts dialed up their exposure to equities throughout the summer as vol receded (target vol exposure’s maxed out), carbon-based lifeforms were more cautious. That’s reflected in pretty much any aggregate (note the emphasis) positioning indicator you care to consult.
The figure above shows you Goldman research‘s composite measure. “Broad equity investor positioning remains in light territory, despite the S&P 500 near its all-time high,” the bank’s David Kostin remarked. “None of the nine positioning measures in our indicator are in ‘stretched’ territory.”
Meanwhile, Goldman’s trading desk published a chart illustrating the extent to which average call volume continues to push ever higher.
The figure below gives you a sense of things. As the chart header notes, call volumes over the last 20 sessions were “by far the largest on record.”
Someone at Bloomberg offered the boilerplate assessment. “It seems like nothing can derail bullish sentiment,” Natalia Kniazhevich wrote, adding that retail remains upbeat, with calls as a share of overall options volume at 65% or so, “one of the highest levels since 2022.”
I’ll take that (the boilerplate explanation, I mean) in the current environment. Indeed, we saw SPX skew mushed flatter into late-September while call skew steepened sharply, indicative of downside hedge abandonment and increased demand for out-of-the-money upside relative to at- (or near-) the-money bullish options, respectively.
According to Citadel’s data, retail exhibited a bullish options bent for a 22nd week headed into Q4 (figure on the left, below).
The figure on the right, above, gives you some context for the streak. It’s among the longest of the post-pandemic era.
In terms of outright stock buying, Citadel’s numbers suggest there’s a retail bid “into any equity weakness,” with a buy skew apparent in 21 of 24 weeks through the end of last month.
Meanwhile, the pros were more cautious as Q4 dawned, with hedge demand increasing. Scott Rubner said institutional clients are looking at cheap downside protection for their long positions which they’d rather stay in for the time being.
Rubner rolled out the “FOMU” acronym. “‘Fear of material underperformance’ to benchmark indices has accelerated and kept longs in play given consecutive moves in the largest cap equities,” he wrote, noting that institutional downside hedging picked up in light of US government shutdown worries and concerns about a softening US labor market.
S&P P/E less than November 2020 much less than 2009 or 1999
Schiller S&P we’re beating 1929, other highs, and coming up on 2000 high
Which, of course, just numbers.
Repeats, rhymes or perhaps mimics is my favorite. Occasionally things are actually different, but you need a whole lot of hindsight for that.
S&P and Schiller both agree that we have been above mean since around 1990.
It just occurred to me that the perfect scenario from Trump’s perspective is a huge stock market crash which will be such a disaster he can stage a coup with Nat Guard troops in all the blue states and leave him in charge of all economic policy data and machinery.
I’m not so sure about that. There is so much grifting and insider trading from this Administration that they all have a very large personal stake in keeping things pumped.
Besides which, he doesn’t need an excuse to do any of that. Neither the Supreme Court nor Congress is willing to put any limitation on him.
One thing I’d add here is that these prolonged, grinding melt-ups always tip over eventually. It’s inevitable, and it’s always the same sequencing.
First the systematic go-forward turns asymmetric (i.e., more to-“sell” in adverse conditions than to-“buy” on a continuation of favorable conditions). By and by, discretionary positioning gets stretched too (it’s not stretched currently) because people get tired of under-capturing the rally. That exposure (the discretionary longs) has to be hedged, and that client hedging manifests as negative convexity risk on the downside as dealers are short those put strikes to end users. If and when something comes along and shocks the market, pushing spot down towards those strikes, dealers’ hedging flows amount to selling into weakness. At that point, you get exaggerated price action which then embeds a latent sell impulse for vol-scalers “who” will be unemotionally de-risking on a delay as trailing realized vol resets higher on the “math” from those outsized spot moves.
None of that is necessarily to predict doom. That whole chain of events could play out in a very benign fashion — e.g., a quick 5% swoon, or a 10% correction that quickly reverses as Pavlov shows up to buy the equity dip and sell the vol rip.
All I’m saying is that we’ve seen this over and over and over again post-GFC, and I guarantee you it’s gonna happen at some point over the next six or so months, and in more or less exactly the sequencing described above. It’s a foregone conclusion.
But again, it needn’t be (and probably won’t be) a disaster or even a bear market. But it’s not safe to tune out during low-vol melt-ups. People who do either i) don’t really understand what drives markets from a flow perspective, or ii) have a long-term horizon and don’t care. If you tune out for the latter reason, hats off. If it’s for the former reason, don’t be surprised when you get blindsided, cause it’s comin’ sooner or later.
In the meantime (between now and the inevitable market swoon), it is a fantastic time to be a stock picker (assuming you pick wisely) vs. in an index.
On a scale of 1 being a humdinger and 10 being the real McCoy, how would you rate this bubble?
And you know, the silly thing is: I could triple my readership if I was willing to cover his silly “letters” and Howard Marks’s repetitive “memos” and the monthly on-air musings of people like Paul Tudor Jones. It’s so pitiful that so many smart people (which is to say people smart enough to be engaged daily in the macro-market narrative) think that stuff’s worth a single second of their time compared to virtually anything else they could be reading or doing. The Marks memos are a perfect example. The guy’s been writing more or less the same memo for decades. It’s just different versions of the same thing. He never says anything new. In fact, I think he even joked once that someone in his own family told him the memos were flagrantly repetitive. I used to cover all of that stuff habitually, and in a tone and cadence that made it sound like I took it seriously. And you’d get these comments from people like, you know, “Oh, gosh, thanks for alerting me to this great memo” or whatever, and I used to think, “Jeeeesus Christ, I’m so sorry.” But I had to get that audience built up and the way to do it was to shout those people’s names in headlines — “Jeremy Grantham Warns…” etc. I just can’t do it anymore. Because it’s tantamount to lying to people. You’re not going to learn anything from those guys. Nothing. I’ve said it a million times by now: The only thing you ever need to read about markets are Jack Bogle’s books. Read those, and you don’t need anything else, ever.
I have always liked Jack.