(Bloomberg) - Hedging on U.S. stocks has risen to the highest level in almost two years, and reached a point that usually precedes equity gains, according to Sundial Capital Research.
A gauge of the extent to which investors seek protection via methods like raising cash or buying put options has risen to the highest level since April 2020, near the peak of pandemic-fueled uncertainty, Sundial’s Jason Goepfert wrote in a note Monday. Put-buying has been elevated among both small and large traders, he said.
“The behavior of scrambling for hedges across various products is a new development,” Goepfert wrote. His equity-hedging index climbed above 80% last week for the first time since early April 2020, he said, and “this is only the 33rd week in 22 years that it’s been above that threshold. After 27 of those weeks, the S&P 500 rallied during the next couple of months.”
U.S. stocks are down to start 2022 as the Federal Reserve prepares to hike rates and inflation accelerates, with investors worrying about the potential impact on financial conditions and risk assets more generally. Strategists including Bank of America Corp.’s Savita Subramanian and Goldman Sachs Group Inc.’s David Kostin are urging caution amid historically elevated valuations and above-average volatility levels.
Even Goepfert isn’t particularly rosy about the longer-term market outlook.
“Almost every metric we watch is in negative territory, and investors are in risk-off mode. That is not a great combo,” he said in the report. “The only potential saving grace is that pessimism reached a high level,” with aggressive hedging -- and “even in unhealthy market environments, that’s usually enough to generate a multi-week to multi-month rebound.”
By Joanna Ossinger
