There's a swelling avalanche of evidence that investors are getting more and more worried about another stock-market crash
- The US stock market may be off to a strong start in 2019, but recent investor behavior suggests people are growing ever-fearful of another meltdown.
- We outline four bearish signals that have flashed under the market's surface in recent days - each of which shows traders are worried and adjusting accordingly.
The benchmark S&P 500 climbed more than 12% in the first quarter of 2019. And if you haven't paid attention to the crosscurrents brewing under the market's surface, you might conclude that the future for stocks is bright.
But a closer examination suggests the situation is exceedingly more dire than many might realize.
Yes, the market largely shrugged off the yield-curve inversion that sparked panic the prior week and finished March in strong fashion. That can be at least partially attributed to investor optimism around the Federal Reserve's newly dovish monetary policy, as well as the prospect of a successful trade-war resolution also played a large role.
However, there are still many folks on Wall Street that don't think those developments will be enough to support the equity market in the long term. Peter Cecchini, the global chief market strategist at Cantor Fitzgerald, falls firmly into that camp.
"The risk-reward to owning US equities continues to remain unfavorable," he wrote in a recent client note. "We still do not believe the Fed's communication was dovish enough to offset its implicit bearishness on economic fundamentals."
Cecchini also said recently that his firm is currently looking to sell the S&P 500 any time it rises above the 2,800 level - a threshold it's flirted with over the past several weeks. That approach matches his year-end forecast of 2,390, which is roughly 15% below current levels.
But don't take Cecchini's word for it. All across the equity landscape, signals are flashing that the market's footing may not be as firm as it seems upon first glance.
Here's a breakdown of four major red flags being thrown up by stocks at present time. When viewed in tandem, it overwhelmingly suggests that the equity market's ongoing rally is scarily low-conviction.
1) Massive equity outflows so far in 2019
Perhaps the most directly damning statistic supporting the idea that the current stock rally is vulnerable is the amount of money that's been yanked from equity funds so far this year.
As the table below (from Bank of America Merrill Lynch) shows, investors have pulled a whopping $79 billion from stocks worldwide in 2019.
So where is that money going? Probably into bonds, considering BAML data shows a huge $86 billion year-to-date inflow for fixed-income securities. Those two figures, when viewed in tandem, don't paint the brightest picture for the future of stocks.
2) Short interest on an S&P 500-linked ETF has spiked
Short interest - or a measure of bets that a security will fall - has spiked in the SPDR S&P 500 ETF, which is designed to track the US equity benchmark.
The measure reached 6.7% of shares outstanding earlier this month, the highest since at least 2016, according to data compiled by IHS Markit. This suggests a groundswell of uncertainty, if not outright underlying bearishness, on domestic stocks.
3) The cost to hedge the S&P 500 ETF has soared
The chart below shows the premium options traders are paying to protect against a 10% decline in the SPDR S&P 500 ETF over the next two months, relative to bets on a 10% increase. As you can see, it's the highest since October 2018 - yet another sign of investor trepidation.
4) Bets on a VIX increase have swelled
The fourth indicator of investor concern deals with the Cboe Volatility Index, or VIX. As you can see in the red highlighted portion of the chart below, wagers that the VIX would increase spiked during a five-day period ended May 25.
Since long bets on the VIX serve as downside hedges on the S&P 500, this sudden increase suggests the fraying of investor nerves - and their appetite for safety.
