Investors are Betting The Trump Presidency, Shunning Hedges

Investors are Betting The Trump Presidency, Shunning Hedges

Investors are Betting The Trump Presidency, Shunning Hedges


Bet the Presidency, is the mantra of investors crowding into the US  The Trump Rally with only modest downside protection despite potential headwinds, from elevated corporate leverage, Fed rate hikes, and potential US policy risks.

Data from Goldman Sachs (NYSE:GS) show investors have discarded hedges bought in the 1st leg of the global rally, between the November election and the end of last year, as they rush “headlong into risk.”

“Our indicator is now in-line with its most complacent level in the past 6 years, suggesting investors are generally un-hedged across both equities and credit,” a derivatives strategists at Goldie wrote in a note Friday.

Premiums for 3 year puts on the S&P 500, as well as 10-year credit-default swaps tied to companies in the benchmark US equity index are notably low relative to less-liquid equity and credit derivatives, according to Goldman data.

The analysts calculate that investors are paying a low premium for the most liquid options across equity and credit, which offer a haven for investors during times of stress.

So pronounced is the apathy over prospects for a broad market selloff that protective options have become too cheap to pass up, the analysts say.

The last time the cost to assume Southside protection in both equity and credit derivative markets was near their current muted levels was July 2015, according to the data.

Such complacent participant positioning exacerbated the US stock market selloff in August 2015, the analysts note, highlighting how hedging via the options market might yield a profitable trading strategy.

“Buyers of these hedges are likely to see the largest boost should there be a correlated market decline.”

Investors have thrown caution to the wind since the November rally that was prompted by expectations of pro-growth US policies from President Donald Trump as well as firming macroeconomic data.

The CBOE Volatility Index, (VIX), a measure of implied volatility calculated from what investors pay for options on the S&P 500 Index is near historic lows even while the global economic policy uncertainty index scales record highs.

Exuberant market sentiment and new money chasing US stocks have some analysts warning the S&P 500 might overshoot its fair-value soon enough.

“Perhaps for the first time since 2009, a lot of people are letting themselves chase the rally,” says on macro strategist. “Retail inflows to stocks are exploding and everyone’s jumping in the pool.”

Is seems now that active money managers are battling their passive peers (ETFs) with respect to performance and inflows, and are reluctant to buy hedges that might eat into their returns.

Friday, the US major stock market indexes finished at: DJIA +2.74 at 21005.71, NAS Comp +9.53 at 5870.77, S&P 500+1.20 at 2383.10

Volume: Trade on the NYSE came in at about 970-M/shares exchanged.

  • NAS Comp +9.1% YTD
  • S&P 500 +6.4% YTD
  • DJIA +6.3% YTD
  • Russell 2000 +2.7% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.29) Bullish (0.25) Bullish (0.32) Bullish (0.29)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bullish (0.33) Bullish (0.31) Very Bullish (0.50) Neutral (0.17)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Very Bullish (0.56) Very Bullish (0.56) Very Bullish (0.62) Very Bullish (0.50)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Bearish (-0.45) Bearish (-0.31) Bearish (-0.49) Very Bearish (-0.54)

Have a terrific weekend.

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