Today tested a lot of traders’ frustration limits. Stay cool out there . . . because Wall Street itself is telling us that it actually will get better.
Yes, 53% of individual investors now think the market is going down in the next 6 months, versus barely 16% who maintain a net bullish outlook. That’s basically as negative as the mood gets.
There are a lot of reasons to feel uneasy. Russia is at war with a neighbor, its energy exports have been largely shut off and the Fed is trying desperately to cool price inflation without crashing the economy.
And then you’ve got years of political deadlock . . . and a market overloaded with gigantic tech companies with slowing growth rates . . . and the lingering hangover from COVID stimulus. And so on, and so forth.
But Wall Street can find a way around each of these fear factors, as long as investors can find the will to weigh risk against reward and make rational choices. There’s always a hierarchy of places to park your money: some relatively smart, others relatively stupid.
When too much money crowds into safety, safety stops being smart. That’s why extreme levels of bearishness are traditionally a signal to take a deep breath, hold your nose and buy stocks.
You don’t have to take my word for it. Even though retail investors are ready to capitulate, the big money on Wall Street is mostly betting on business as usual.
According to the options market, stocks will probably have a rough month. Today confirmed that, with puts that would have been at the money this morning now worth three times what you’d pay for the equivalent calls.
Break that down and the big money currently sees the S&P 500 falling as much as 5% between now and the next Fed meeting, while the potential likely upside has come in significantly.
If the broad market climbs even 2% in the coming month, a lot of smart players will be disappointed. That doesn’t happen a lot these days. Generally, the smart players move the market, not the other way around.
Barring that kind of upset, the risk-return math just doesn’t favor the bulls in the coming month. Come back in 5-6 weeks if you aren’t willing to put up with continued sentimental headwinds.
(Of course if you’re an options trader yourself, you can always buy puts as well as calls and turn the wind around. We do it a lot. It’s been refreshing to be able to put money to work.)
What I want to emphasize is that even the puts aren’t banking on the S&P 500 dropping more than 5% between now and mid-June. That’s the likely limit on the downside that big money is flashing.
That’s just another day like today. And even a few days like today stacked together are not a crash. For that to happen, the bottom has to fall a lot faster and fiercer than we can see in the options market.
I can live through another day or two like today. So, evidently, can the big money traders who get a lot more optimistic looking toward the summer and beyond.
Go out on the expiration calendar to after the November election and the range of possibilities expands . . . with more room on the upside. Expectations brighten. Dread fades.
Money is still biased to the downside, don’t get me wrong. But the imbalance between the bulls and the bears gets a lot more even in six months.
And go out a year and the outcomes balance out. We might see the S&P 500 go up 10% or down 10% between now and next April, but the bets are split roughly in the middle.
Options on the NASDAQ tell a similar story. No crash predicted. At worst, another 10% or so in losses over the coming year.
That’s a number that stings. But believe me, it isn’t the end of the world. And that’s the only reason stocks should be priced for the end of the world.
Otherwise, you buy. Buy the banks. Buy consumer stocks, built to last. Buy companies you know will outlive you.