A Bloomberg headline read “Stocks Show Exhaustion After a Surge in Bullishness.” Bullishness among retail investors is viewed as a contrarian indicator. According to the American Association of Individual Investors, retail investors are bullish for the first time since April and the percentage of retail investors with a bearish view over the next six months fell to 25%, the lowest since November 2021.
Volume of short dated out of the money call options is surging to levels experienced 2 years ago. Trading volume on options with zero days to expiration is also surging and is swamping the turnover in the underlying securities according to Barons.
Some call this beta gamming on steroids, or the innate bullishness that occurs with massive purchases of call options. It works until it does not and then suddenly end with a loud thud. Bloomberg writes “such an environment never end well for the markets and this time will be no different.”
As widely discussed the VIX or a measurement of volatility is at levels associated with extreme complacency and massive reversals.
Speaking of reversals, the market is increasing the odds of a 6% peak Federal Funds rate. Are these trades hedges or is market psychology changing dramatically?
If psychology is or has already changed, the odds 2023 will follow a similar path of 2001 increases exponentially [a strong early year advance recapturing some of the previous year’s large decline and then a dramatic selloff] A major reason for the stellar 2023 start is the belief that interest rates are near their apex and rates will be lower by year’s end.
Commenting on yesterday’s market activity, equities sold off ending around the lows for the day as short dated Treasury yields surged. The VIX ended about 10% above its intraday lows, closing about 6.5% higher on rising interest rate fears.
What will happen today? The University of Michigan Sentiment Survey is released and can influence psychology.
Last night the foreign markets were down. London was down 0.70%, Paris down 1.31% and Frankfurt down 1.54%. China was down 0.59%, Japan up 0.31% and Hang Seng down 2.01%
Dow and NASADQ futures are down 0.4% and 1.5%, respectively on hawkish monetary policy concerns. Oil is up about 3% after Russia said it will cut output. The 10-year is off 13/32 to yield 3.71%.
