Market `Melt-Up' Exposes Investor Gap, Bernstein Quants Say

(Bloomberg) -- This year’s market rally has revealed a schism among investors, according to quantitative strategists at Sanford C. Bernstein & Co.

In equities, indicators such as fund flows point to neutral investor confidence even as global markets set fresh records. By contrast, traders have increased short positions on assets such as gold, U.S. Treasuries and volatility that typically offer protection in the case of a stock sell-off. That behavior suggests an overall bullishness “to a degree that is becoming alarming,” according to a research note from the brokerage.

“The shorting of tail hedges does likely put more of a limit on the ‘melt up’ scenario,” even if it isn’t sufficient to justify becoming bearish just yet, analysts including head of global quantitative and European equity strategy Inigo Fraser-Jenkins wrote in a research note dated April 29.

Stocks and bonds have advanced this year as investors speculate on a resolution to the U.S.-China trade conflict and global central banks tone down their previously hawkish stances.

Gauges of volatility have also fallen to the low end of their historical ranges as investors bet the market calm will continue. Speculative investors including hedge funds have built up the biggest short position on record in the Cboe Volatility Index, known as the VIX, according to data from the Commodity Futures Trading Commission.

To be sure, some investors believe that the picture is more nuanced, and that bets that volatility could bounce back are also sizable.

Given high investor demand for low-volatility stocks in the U.S., Bernstein’s quants recommend scouring global markets and within sectors for stocks which have not been bid up to the same extent.

“While cross-asset traders are increasing short VIX positions, at the single stock level the opposite is happening and near-record premia are being demanded for low vol U.S. stocks,” the note said. “However, globally the picture is very different.”

To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger, Andreea Papuc

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