Bearish trades crater fast in Wall Street’s high-momentum rally
Wall Street proves too tempting to pass up for a handful of gutsy traders.
Risky assets with lavish valuations march on against expectations, the group of stock winners stays stubbornly concentrated, interest-rate cuts get delayed once more.
Certain things are about to reverse, these traders take the bait. In one example, they plowed $500 million at the start of the month — the most this year — into an amped-up exchange-traded fund designed to win big when the Nasdaq 100 drops. The problem: The tech-heavy index keeps going up with a fresh 1.4% advance this week. In turn, the bearish ETF has plunged 20% this month alone.
It’s a similar story for those who’ve recently dived into trades that gain when volatility rises, from vanilla options hedges to more complex black-swan portfolio insurance. In each case, buyers have paid dearly as bullish sentiment endures.
“Buying something that’s out of favor is intellectually compelling and sound, but it goes against human nature,” said quant guru Rob Arnott, a value-investing proponent who touts diversifying trades including overseas exposures. “We’re hardwired to say ‘get me out of here when we see pain or losses’,” according to the Research Affiliates founder.
Sky-high valuations, a foot-dragging Federal Reserve and an equally intractable political backdrop all put prudence at a premium. Yet practically every bearish impulse has proven costly as Corporate America’s earnings engine powers ahead. Animal spirits are raging in crypto and returning in select emerging markets,
