Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

How Traders Have Changed Since the Massive Selloff Earlier This Year

(Bloomberg) -- One by one, the milestones are falling, as stocks claw back from their nightmare winter. One thing that isn’t recovering as fast: the euphoria that foreshadowed the horrors of February and March.

Three days of gains pushed the S&P 500 Index to the brink of recouping its losses since Jan. 30, the initial lurch of what became the first correction in two years. In the way of the rally is a higher wall of worry -- interest rates, slowing growth, the trade war. Tech earnings joined the list Thursday as Facebook Inc. plunged 20 percent on disappointing results.

“In January, the markets just kept going up and up, and it didn’t feel like it’s supported by anything,” Myles VanderWeele, a principal who helps oversee about $4.5 billion at San Francisco-based BOS, said by phone. “Now we’re in place where people are keeping an eye on the shop.”

Here’s a look at how the landscape has changed:

Firmer Valuations

Stock prices are nearly back, but valuations are not. The S&P 500 is trading at 16.7 times estimated earnings, 9 percent lower than in January and close to the five-year average of 16.4. A return to the 18.4 multiple seen during this year’s market peak seems unlikely amid trade tensions and concern about the sustainability of the economic cycle, according to Dennis Debusschere, head of portfolio strategy at Evercore ISI.

How Traders Have Changed Since the Massive Selloff Earlier This Year

Bears Back

With the S&P 500 up in 14 of the previous 15 months, being a bear didn’t pay in January -- and there were very few around. That’s not the case now. After touching a 10-month low at the end of December, short sales as a percentage of total U.S. shares available for trading have climbed back to the five-year average of 3.9 percent.

How Traders Have Changed Since the Massive Selloff Earlier This Year

Slow Flows

A mad dash for stocks catapulted the S&P 500 to all-time highs at the beginning of the year. Six months later, the spirit has been lost. After pouring more than $40 billion to equity ETFs in January, investors have scaled back their optimism, with monthly inflows trickling to an average $2.4 billion, data compiled by Bloomberg show.

How Traders Have Changed Since the Massive Selloff Earlier This Year

Going by price, the S&P 500 and the biggest ETFs tracking it are within 2 percent of erasing the correction. Going by market capitalization, it’s a different story. Vanguard’s fund is back above its January high, iShares’s is about 3 percent away and State Street’s SPDR ETF Trust is mired 12 percent from its high. The difference reflects inflows into the securities.

How Traders Have Changed Since the Massive Selloff Earlier This Year

VIX Redux

For most, the sight of the Cboe Volatility Index doubling in early February is the starkest image of the correction. And while the fear gauge is obviously nowhere near its level at the height of the selloff, at around 12 it’s yet to fall all the way back to its average reading in January. Elsewhere, the frenzied trading in futures tied to the index has fallen way off.

How Traders Have Changed Since the Massive Selloff Earlier This Year

Economic Uncertainty

One reason for subdued pulses is a leveling off in economic expectations. Citigroup’s economic surprise index is at a 10-month low and predictions for the growth in 2019’s gross domestic product have held steady near 2.5 percent over the past three months. Heading into 2018, economic data were exceeding expectations at the fastest rate in five years and economists kept ratcheting up their growth forecasts.

How Traders Have Changed Since the Massive Selloff Earlier This Year

Inverted Curve Fear

Another check on froth has been signals from the bond market. With the gap between two-year and 10-year Treasury yields the narrowest since 2007, investors are growing jittery that the flattening curve is saying something bad about the future. You may have heard: an inverted curve has preceded a lot of U.S. recessions.

How Traders Have Changed Since the Massive Selloff Earlier This Year

Stalling Growth

Adding to anxiety is a selloff in emerging markets, particularly China, where the Shanghai Composite Index plunged into a bear market earlier this year as a trade spat with the U.S. escalated. The MSCI Emerging Market Index fell for six straight months through June, the longest streak since 2008. It’s a turnaround from January, when the benchmark jumped more than 8 percent for the best start of a year since 2012.

How Traders Have Changed Since the Massive Selloff Earlier This Year

Short VIX Bets Return

Market sentiment has changed a lot since January, but investors’ bets on shorter volatility are back to where they were six months ago. Hedge funds boosted their net-short position in Cboe Volatility Index futures to the highest since late January, Commodity Futures Trading Commission data showed last week. The last time short bets were at this level, in late January, before a 116 percent spike in volatility the next month.

How Traders Have Changed Since the Massive Selloff Earlier This Year

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