Wall Street’s high-momentum rally has bearish trades cratering fast
With each passing week, the bear case for 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 and interest rate cuts get delayed once more.
Certain things are about to reverse, and these traders take the bait. In one example, they plowed US$500 million at the start of the month — the most this year — into an amped-up exchange-traded fund designed to win big when theNasdaq 100 drops. The problem: The tech-heavy index keeps going up with a fresh 1.4 per cent advance this week. In turn, the bearish ETF has plunged 20 per cent 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 favour is intellectually compelling and sound, but it goes against human nature,” said quant guru Rob Arnott, founder of Research Affiliates LLC and 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.’”
Sky-high valuations, a foot-dragging United States 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 cryptocurrency and returning in select emerging markets, while riskier corporate bonds continue to top their higher-quality counterparts.
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