CREDIT SUISSE: There's been a 'fundamental shift' in how investors view the stock market's relentless rally

  • Recent options-trading activity suggests “a more fundamental shift in outlook, rather than just bullish tactical positioning,” according to Credit Suisse.
  • The past two weeks have seen a drop in the S&P 500’s six-month skew, which measures option prices betting on a decline relative to those betting on a rise.
  • That’s a noteworthy difference from the drop in short-dated skew, which was already happening, Credit Suisse says.

The stock market’s unrelenting march higher has changed how investors see this bull market, according to Credit Suisse.

As the S&P 500 rose, investors positioned themselves to profit from new highs by demanding more call options, which are instruments that give them right to buy stocks at an agreed price.

In a note on Monday, Mandy Xu, the chief equity derivatives strategist at Credit Suisse, spotlights the S&P 500’s skew, a measure that tracks option prices betting on a decline relative to those betting on a rise.

Short-term skew fell in the final months of 2017, implying traders were demanding a higher volume of options that would benefit from higher stock prices. This wasn’t unexpected, since the market was rising in just the right mix of conditions: Volatility as measured by the Cboe’s index was at historic lows, the GOP was set to pass the most comprehensive corporate-tax reform in decades, and economies around the world were in growth mode.

“However, longer-dated skew had stayed fairly elevated – until now,” Xu said.

“Over the past two weeks, SPX 6M skew has fallen from the 82nd percentile high to now the 55th percentile. The decline in longer-dated skew suggests a more fundamental shift in outlook, rather than just bullish tactical positioning.”

That is, traders appear to be betting that stocks could keep going up well into 2018.

1 9 18 long term skew COTDCredit Suisse

Morgan Stanley’s equity analysts recently declared we’re in the full-blown “euphoria” stage of this bull market. And it’s not hard to find proof of this claim.

The S&P 500 is the most ‘overbought‘ in at least 22 years, according to its relative-strength index, which measures the size and speed of its price movements.

Across sectors, analysts are betting that the market’s biggest driver – earnings growth – will be the most impressive in several years. The analysts who forecast company earnings have made the smallest cuts to their fourth-quarter estimates since 2010, according to FactSet.

The American Association of Individual Investors found last week that only 15.6% of those it polled were bearish, a three-year low, and down from 34% a month ago.

The list goes on. And so, it’s no surprise, as Credit Suisse suggests, that it’s getting lonelier to be a bear in this market.

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