Since April, the Cboe volatility index VIX has risen by nearly 30% and is approaching the 20 level. The last time this situation occurred was in October last year, when concerns about the Federal Reserve's policies and resonance in the financial reporting season triggered a correction in US stocks, with the S&P 500 index and Nasdaq plummeting nearly 7% in two weeks.
Now, the market may once again reach a critical point. Goldman Sachs predicts that if the S&P 500 effectively falls below 5135 points, the short-term trend will turn negative, and hedge funds may sell $20 billion to $42 billion in US stocks within the next month.
The buying of put options is coming with great momentum
In the eyes of many market insiders, the recent rise in VIX combined with an increase in demand for put options may indicate that the bull market that has been going on for nearly five months is on the brink of collapse, and the risk of a pullback is increasing.
Dow Jones market data shows that investor demand for put options has further increased, with the 10 day rolling average of the Cboe stock put call option ratio pushing up to 0.661 in the past week, the highest value since the beginning of this year. Charlie McElliott, derivatives strategist at Nomura Securities, said that this rebound indicates that funds are buying put options while demand for call options cools down.
After combining historical data statistics, Nomura Securities found that the skewness of the options market has sharply increased from its lowest historical level since March, reaching the 26th percentile in 2000. According to McElliott, this usually coincides with periods when the excess return on stocks is very low.
Given that the outlook for the Federal Reserve's interest rate cut is no longer clear, investors remain cautious about potential fluctuations in the second quarter. Joe Kalish, Chief Global Macro Strategist at Ned Davis Research, said:; Quota; The market and the Federal Reserve have finally reached a consensus on expectations, but recent economic reports have brought greater pressure. If we don't see more progress in inflation, the market's volatility will be even greater& Amp; Quota;
According to the pricing of the Chicago Mercantile Exchange's FedWatch Tool, the likelihood of a rate cut in June has dropped from a peak of nearly 80% last month to 20%. At the same time, the space for policy easing throughout the year has fallen to around 40 basis points, indicating that the market believes that the Federal Reserve can only lower interest rates once within the year.
Bob Schwartz, senior economist at the Oxford Institute of Economics, previously stated in an interview with First Financial reporters that the Fed's reliance on data slogans may force it to maintain high interest rates for a longer period of time, and the possibility of its first rate cut in September is increasing. He believes that the performance of core personal consumption expenditure (PCE) this week is crucial for the Federal Reserve, which will depend on changes in the labor market and wage growth.
Torsten Slok, Chief Economist of asset management giant Apollo Asset Management, has issued a warning that if the Federal Reserve keeps interest rates unchanged, the US economy will; Quota; Hard landing; Quota;, And the US stock market may also repeat the brutal decline of 2022. Slock predicts that the Federal Reserve may keep interest rates unchanged for at least one to two quarters in the future to achieve the goal of cooling the economy.
Financial reporting season welcomes critical moments
As the Federal Reserve enters a period of silence, market attention shifts towards the upcoming peak performance period. More than 150 companies in the S&P 500 index will announce their first quarter results this week. This includes technology giants such as Microsoft, Meta, and Google's parent company Alphabet.
According to data provided by the London Stock Exchange (LSEG) to First Financial reporters, analysts predict that the total earnings of S&P 500 index companies in the first quarter will increase by 5.7% compared to the same period last year, lower than the growth rate of 10.1% in the fourth quarter of 2023.
The profit of the communication service industry, including companies such as Alphabet, is expected to increase by 26.7% compared to a year ago. The technology industry, including Nvidia, Apple, and Microsoft, is expected to grow by 20.9% in the first quarter. In contrast, in the fourth quarter of 2023, the revenue growth of the communication service industry ranked first, with a year-on-year increase of 53.3%, while the revenue growth of the technology industry was 24.2%. The energy, materials, and healthcare industries are expected to see a significant year-on-year decline in profits.
Funds have been continuously leaving recently, and the significant decline in chip stocks that have performed well since last year has raised concerns. Michael Hartnett, Chief Investment Strategist at Bank of America Global Research, wrote in his weekly market fund flow report that in the past two weeks, the outflow of funds from US large cap funds exceeded $20 billion, the highest in 16 months.
Max Kettner, Chief Multi Asset Strategist at HSBC, stated that since the beginning of the year, stock valuations have changed with the decline in US Treasury volatility& Amp; Quota; The market pricing is now slightly higher than the level indicated by interest rate fluctuations. Therefore, we will not increase our holdings in stocks at this time, as unexpected data from hawks may still lead to intermittent declines in stock valuations& Amp; Quota;
HSBC also suggests that investors temporarily stay away from small cap stocks. Because if US bond yields rise again, its profitability will face more challenges, and floating rate debt is also a risk.
Manish Kabra, head of US equity strategy at Faxing Bank, mentioned in a client report that whether the Federal Reserve will cut interest rates within the year has become a key factor in the market's direction; Quota; Where the interest rate will ultimately fall may be important for valuation& Amp; Quota; Faxing Bank has raised potential risks of future market declines, including a rebound in 10-year US Treasury yields to over 5%, which could cause the S&P 500 index to drop to 4600 points; Retail gasoline prices soared to over $4 per gallon, prompting the Federal Reserve to restart interest rate hikes.