Fear of missing out is driving a buying rush on Wall Street, with options market metrics flashing some of the most bullish signals in years. Easing tensions in the Middle East, falling oil prices and robust earnings reports have supported the market’s climb to new highs, but some options-market measures suggest investors’ FOMO has emerged as a distinct driver of the rally.
“There are several factors, but FOMO is a part of it,” said Mark Hackett, chief market strategist at Nationwide.
“Most of the core tenets of the bear thesis have broken down, and being short on an absolute or relative basis is a risk that many are unwilling to take,” Hackett said. Before a 5.8% jump logged by the S&P 500 in the four sessions through August 4, the benchmark index had traded within a 5.7% range for about three months — far narrower than the average 12.5% range for rolling three-month periods since 2006. The index’s sharp gain came into even starker relief following a bruising selloff in AI shares late in July.
For years, investors have been rewarded for buying every market dip. That’s showing up again, with various gauges of investors’ enthusiasm for upside wagers perking up.
The one-month average daily ratio of calls to puts on the SP 500 has risen to 0.9, among the most bullish readings in at least four years, according to a Reuters analysis of Trade Alert data.
A measure of short-term S&P 500 call skew — a gauge of how much extra investors are willing to pay for bets on a fast, sharp rally in stocks, relative to bets on a decline — last week soared to a two-year high, according to Susquehanna Financial Group analysis. Another sign of the market’s overheated conditions comes from the Bullish Percent Index, a market-breadth indicator that tracks the percentage of SP 500 stocks trading in bullish technical patterns. The measure rose above the 70% mark, pointing to overbought conditions, according to Adam Turnquist, chief technical strategist at LPL Financial.
Taken together, these indicators highlight how much markets have been driven lately by momentum and speculative enthusiasm rather than by fundamentals.
“FOMO never left. It just wasn’t in the forefront of the market,” said Steve Sosnick, chief strategist at Interactive Brokers, who sees investors’ impulse to reach for further upside as a form of insurance against being left behind by the market rally.
“There are plenty of institutional investors who are more concerned with missing a rally than they are about the market going down,” Sosnick said.
Volatility upturned
One signal of the strength of the upside bid is that volatility gauges, which typically sink when the market rallies, have on some days risen alongside stocks.
For instance, on August 4, when the SP 500 jumped nearly 2%, the Cboe Volatility Index rose by nearly one point.
“If you’ve got this strong demand for calls, you can get the VIX increasing when the market is going up,” said Garrett DeSimone, head of quantitative research at OptionMetrics.
The high demand for call options, which gives investors the right to buy shares at a fixed price by a set date, suggests some investors may be scrambling to catch up on a rally they missed, rather than positioning steadily for further gains, analysts said.
“The combo of volatility increasing and call skew also increasing suggests that investors were generally under-exposed and thus at risk of underperforming to the upside, hence the need to aggressively buy upside calls,” said Susquehanna strategist Christopher Jacobson.
Contrarian signal
Some investors view these options market measures as contrarian signals, arguing that caution may be warranted when they spike.
OptionMetrics’ DeSimone said that while the strength of the rally may lead investors to believe risks weighing on stocks have been resolved, some of the intensity of the market’s move may instead have been driven by technical factors in the options market.
Still, some investors take comfort in the view that beneath the FOMO-fueled froth, stock market bulls retain important support including strong economic conditions and continued appetite for AI-related investments.
“While leverage issues and how much further the market can rally through year-end are open for debate, U.S. fundamentals sit on a very solid base, in our view,” said Anthony Saglimbene, chief market strategist at Ameriprise.
Source: Khaleej Times