Options Market Signals Lingering Caution Over U.S. Stock Surge

(Bloomberg) -- The options market is flashing warning signs about the record-setting rally in U.S. stocks.

A measure of how much bearish options cost versus bullish ones, known as skew, is down from recent highs but remains elevated, according to Evercore ISI’s Dennis DeBusschere. A gauge of sentiment from the American Association of Individual Investors is also in bearish territory, he wrote in a note.

The S&P 500 Index is up 56% from the lows in March sparked by the coronavirus outbreak, even as the pace of the U.S. economic recovery from the pandemic remains uncertain. Investors have found reassurance in huge injections of stimulus and loose U.S. monetary policy, including the Federal Reserve’s plan to take a more relaxed approach on inflation. How long can the rally last remains one of the most divisive questions in finance.

At a global level, other indicators suggest investor allocations to stocks remain below typical levels, according to a JPMorgan Chase & Co. note.

Strategists led by Nikolaos Panigirtzoglou said for the medium to long term, they found equity positioning to be low overall based on “the implied cash, bond and equity allocations of non-bank investors worldwide.”

Non-bank investors -- such as households, corporations and pension funds, among others -- have a below-average 41% allocation to equities, versus almost 48% at the start of 2018. A climb back to the latter level implies a 32% rise in global stocks, the strategists wrote.

Signs of overextension in equity allocations are confined to individual U.S. stocks and Commodity Trading Advisers, they said. CTAs are sometimes known as momentum investors.

©2020 Bloomberg L.P.