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World News See other World News Articles Title: $1 Trillion in Puts... What to Expect the Next 40 Days By Scott Garliss Investor sentiment is pricing in a lot of bad news... And right now, there's plenty to be pessimistic about... Russia's invasion of Ukraine is creating uncertainty around the energy supply and inflation outlooks. And Wall Street is awaiting more clarity on the Federal Reserve's interest-rate intentions. When money managers and traders grow uncertain, they tend to sell first and ask questions later. That way, they're ensuring they have cash on hand to invest when the market bottoms. Otherwise, by doing nothing, they would be watching their investments tank yet be unable to buy more when the environment turns. So when the data indicate investors are super cautious, it usually means better returns lie ahead. That should support a long-term rally in the S&P 500. But don't take my word for it, take a look at the following charts... One way to observe investor pessimism is to look at put-volume activity. Puts are an options contract used to lock in a selling price on a stock or index at a specific price on a future date. An investor can use this as a bet on a decline in the underlying asset's price, to protect against any downside in an investment, or to lock in a gain at a specific price. This first graph is the 50-day moving average of U.S. total option put volume. The index measures the amount of equity and index put volume traded on domestic exchanges... You can see volume has reached the highest level on record. It shows there's even more pessimism now than we saw during the pandemic downturn in March 2020. Confirming this, brokerage firm Goldman Sachs said $1 trillion worth of put contracts changed hands just last week compared with the $800 billion figure near the S&P 500's pandemic-driven lows in March 2020. We're seeing a similar indication from the Chicago Board Options Exchange's Volatility Index ("VIX"). The gauge is a measure of risk sentiment. When the value rises, it means investors are scared... And when it falls, it signals they're complacent. Currently, the number is above 34.5. That's the highest level since January 2021. Historically speaking, that kind of worry can lead to solid investment returns. Take a look at the following chart from Refinitiv. You can see that when the VIX has remained above 30 for an extended period of time, the S&P 500 tends to rally over the next year... And then there's military conflict... No one knows how battles and wars really start or will end. Sometimes, the cause is obvious, but most times we'll never know the true reasons behind a conflict. Either way, they're an unfortunate part of history. And the current conflict in Ukraine is no different. Russia is one of the world's largest energy producers. It supplies Europe with 40% of its energy. Wall Street is concerned the use of sanctions by the West to stop Russia's actions will evoke a response. They're worried Moscow will cut off oil supplies to Europe. The change could drive those nations to seek resources elsewhere, driving up prices for the rest of the world. Given that oil is a driver of inflation, the dynamic could worsen the cost outlook for consumers and businesses. It could also force global central banks to raise interest rates faster than expected. The dynamic is creating global growth outlook fears and causing investors to sell stocks. But again, if we look at the dynamic historically, geopolitical events tend to see near-term overreactions in the stock market. Take a look at the following chart from LPL Financial. It goes as far back as Pearl Harbor. It shows the typical S&P 500 sell-off tends to average 4.6% over the first 20 days. However, a full recovery typically happens within another 23 days... he current situation began on February 21 when Russia said it would secure the borders of the breakaway Ukrainian regions of Luhansk and Donetsk. The S&P 500 is off 0.9% since then, so we still have some room before a near-term bottom. As we said from the start, environments like the current one are unsettling. No one knows how they're going to turn out. And there's plenty of reason to be cautious. But history shows patience and persistence will pay off. I'm not saying throw all of your hard-earned dollars at the stock market right now... But at the least, make sure you're doing your homework. That way, you'll feel comfortable and be able to sleep comfortably at night when you decide to invest. Because the contrarian in me says the current pessimism points to steady gains for the S&P 500. Poster Comment: Contrarian view. I think it's commodities that go up next. Post Comment Private Reply Ignore Thread
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