The stock market has been experiencing volatility and uncertainty due to various factors. One of the concerns is the valuation of stocks, with the S&P 500 reaching levels unseen since the dot-com boom [77079743]. Additionally, the market has waning confidence in the economy, earnings, and stock values [5d6ff67a]. Despite a hot GDP number, stocks have struggled to sustain a rally, as good news is seen as bad news due to the Federal Reserve's resolve to keep interest rates high [5d6ff67a]. The Federal Reserve's stance on higher rates has also contributed to the market's cautiousness [ad955edb]. Investors are closely monitoring economic indicators, including wages, oil prices, and inflation, as well as the Federal Reserve's stance on monetary policy [f2e92383]. The bond market rout and rising Treasury yields have added to the market's uncertainty [c4626583].
In terms of market outlook, analysts have varying opinions. Some believe that the recent gains in stocks will continue, while others expect a potential recession and lower earnings estimates [7d6a5594] [04b6047c]. The S&P 500's year-to-date high may have been the peak for 2023, according to one analyst [7d6a5594]. The market's resilience in the face of challenges suggests that investors remain confident in the long-term prospects of the stock market [f2e92383]. However, caution is advised, as investing in any asset carries risks [05f673e5].
The bond market's volatility is causing uncertainty for a potential rally in US stocks. While the Cboe Volatility Index, which measures stock gyrations, has fallen to a seven-week low, the MOVE index, which measures Treasury volatility expectations, remains near its recent high [165b961e]. The MOVE index is nearly eight times higher than its equity-focused counterpart. Analysts suggest that if Treasury market volatility decreases, it would be positive news for stock market investors [165b961e].
US stocks are currently experiencing sluggishness due to a $5 trillion options expiration, the largest on record for S&P 500-linked derivatives [840eb3ee]. This expiration has caused dealers to square their books, potentially dampening swings in US stocks. Market participants believe that behavior ahead of the expiration is muting stock gyrations and may be a reason why equities have traded in a tight range over the last few weeks [840eb3ee]. The S&P 500 has not experienced a greater than 1% move in either direction for 19 straight sessions, the longest streak since August [840eb3ee]. The lull in volatility could extend to the Federal Reserve meeting on Wednesday, where investors are looking for hints on whether policymakers are considering cutting rates sooner [840eb3ee]. Two years ago, a similar large options expiration led to a decrease in volatility followed by a 3% rally in the last two weeks of the year [840eb3ee].
Six years after a famous blowup in the volatility market shattered a lengthy calm in US stocks, Wall Street is growing concerned over a new boom in trades that bet against equity turbulence. Billions of dollars are pouring into strategies that seek to juice returns by selling options [f7140b15].
The stock market fell as big tech sold off and a pile of options expiring Friday threatened to trigger sudden price swings. Wall Street is facing a quarterly episode ominously known as triple witching in which derivatives contracts tied to stocks, index options and futures are scheduled to mature — compelling traders en masse to roll over their existing positions or to start new ones. About $5.3 trillion are set to expire, according to Rocky Fishman, founder of derivatives analytical firm Asym 500. The options episode comes at a critical juncture for markets positioning for next week’s Federal Reserve policy meeting. A recent pickup in inflation isn’t likely to shift officials’ forecasts for three interest-rate cuts this year and four in 2025, according to economists surveyed by Bloomberg News. The S&P 500 dropped to around 5,110, with trading volume that was 25% above the average of the past month. The Nasdaq 100 fell about 1%. Adobe Inc. sank on a weak sales outlook. Nvidia Corp. headed toward a 10th straight weekly gain, with its artificial intelligence conference just days away. Treasury 10-year bonds were set for their worst week this year. [b709b474]
The US options skew has reached a record low, indicating investor confidence in the stock market rally [aef5a6c2]. The options skew is a measure of the difference in implied volatility between out-of-the-money put options and out-of-the-money call options. A low skew suggests that investors are less concerned about downside risk and are more optimistic about the market's future performance. This trend reflects the overall positive sentiment in the market, driven by factors such as the economic recovery, fiscal stimulus measures, and the progress in COVID-19 vaccinations. The low options skew is also seen as a sign that investors are not anticipating any major market disruptions or volatility in the near term. However, some analysts caution that this could be a contrarian indicator, as extreme optimism in the market can sometimes precede a correction or pullback. Overall, the low options skew is seen as a reflection of investor confidence in the ongoing stock market rally [aef5a6c2].
Options-selling strategies have played a role in tempering US stock swings and contributing to a long period of market calm [823390ad]. These strategies involve selling out-of-the-money call options against stock holdings, generating income for ETFs. Market makers often hedge their exposure to these contracts by selling stock index futures. When markets rise, the ETFs buy back the call options they sold, prompting market makers to close their own hedges by buying index futures, which supports stocks. While these strategies can moderate market moves, they may not prevent a selloff if the outlook for stocks drastically changes. The presence of volatility-selling funds, including those employing options-selling strategies, has helped keep volatility low in recent years. However, a sudden unwinding of these strategies could lead to increased volatility and uncertainty in the market [823390ad].
Options market participants and operators are bracing for increased volatility in the second half of 2024 [6f4b8828]. The US economy diverging from expectations and a contentious presidential election are among the factors that are expected to contribute to the heightened market volatility. The economic landscape has shifted from early 2023, when expectations were for a recession and interest rate cuts from the Federal Reserve, to the present, where inflation is creeping back up. Options are seen as a tool to help investors manage risk in this environment. Meaghan Dugan, Head of Options at NYSE, noted the growth of options markets in recent years and expressed confidence that even if volatility surges in the fall, the markets should resume a growth path post-election. Henry Schwartz, Vice President and Global Head of Client Engagement at Cboe Global Markets, highlighted the increase in options trading volumes since 2019 and mentioned exciting developments in the options market. The article also mentions the growth of retail trading in options markets and the compression of the expiration cycle. Overall, the article emphasizes the anticipation of increased market volatility in the second half of 2024 and the role of options in managing risk [6f4b8828].
Options traders are expecting a significant swing in the S&P 500 Index after Friday's US jobs report, which will provide clarity on potential interest rate cuts by the Federal Reserve. Based on the cost of at-the-money puts and calls expiring Friday, the S&P 500 is expected to move 1.2% in either direction. This is the largest implied swing ahead of an employment report since March 2023. The labor market's strength will determine the trajectory of inflation and the likelihood of borrowing costs falling later this year. The VIX index, reflecting the 30-day implied volatility of the S&P 500, has fallen back after reaching its highest level in over five months. Fed Chair Jerome Powell emphasized the need for more evidence of cooling inflation before considering rate cuts. The jobs report, set to be released on Friday, is forecasted to show non-farm payrolls growth moderating to a strong pace in April with stable, low unemployment. [c7fd250c]