Amid the high rise of U.S. stock market gains, investors are maintaining safe play
Amid the rising concerns of a potential market crash, the demand for option protection has also increased. The concern is that after the victory of Donald Trump in the presidential election of the U.S., the stock market has seen a tremendous rise and might start to pull back now. The CBOE Volatility Index has marked the lowest at 14.10, and this marking is important because this index is one of the indicators of the investor’s sentiment. So, basically, the current market is flowing with mixed sets of moods; the confusion is created due to both bullish moves and cautious marking in the market.
Sharp caution fuels equivocation
The indices such as the Tail Dex Index and CBOE Skew indicate a need for complete protection against the possible fall of market performance. The potential fall in market rally means that there is a high chance of rising consumer prices and a cautious situation in world trade, which also shows an uncertainty in the global financial outlook for the upcoming year.
As of Monday`s report, the Trump administration has lightened up the chances for a trade war, as the U.S. imposed heavy tariffs on Canada, Mexico, and China, and this might impact the upcoming global trade outlook badly. The U.S. stock showed a mild fluctuation, and after this, the investors became more cautious about the market swings as they recalled Trump`s first term swings.
Investors support unpredictability
RBC Capital Market`s head of derivative strategy, Amy Wu Silverman, has stated that the investors are against the fat tail risks, which means a term used for the risk level of extreme fluctuations in the market. This scenario indicates the rising cautious situation in geopolitics and possible changes in policies, which might lead to market unpredictability.
Silverman also noticed that the investors invested heavily in the equities; the risk of extreme market fluctuations has increased due to the increase in geopolitical uncertainties and possible policy changes, especially in terms of tariffs. This cautious situation has increased the National Tail Dex Index by 13.64, which is higher than its yearly averages by around 70%, and it is also double the 6.68 low of the previous loss.
Demand for tail risk is high
The index CBOE skew has indicated increasing risks of heavy fluctuations in the market, and during Monday`s session this index also hit a two-month high of 167.28. Basically, the demand is on the rise for VIX call options, which are hedged against the sell-off gains. In the last three years, the skew index shows the highest level of rise in the last five years.
The co-head of Susquehanna`s derivative strategy, Mr. Chris Murphy, has given a detailed note that while there is a probability of around 80 to 90% of market moves, the VIX levels show it low. But the market is on price rise, which indicates high chances for the tail events.
Acceptance of hedging driven by high risks
UBS`s equity derivatives strategist Maxwell Grinacoff has noted that the recent tariff implementation by Donald Trump can increase the risks for the investors in the upcoming months. This situation might influence the investors to take a focus on downside hedging as the market is looking for possible fluctuations amid the geopolitical and economic policy changes.
Additionally, uncertainty over the rate cuts by the Federal Reserve, the situation is also influenced by the ongoing war between Russia and Ukraine and also Israel and Hamas.
USB`s Grinacoff has indicated the next year`s market might be similar to 2018, in spite of the stock markets initial new rise, but the trade fall and tariff increment could weaken the growth anticipation, and also the volatility has increased. The downside risk is now tougher for the investors navigating the volatility of the market outlook.
Winding up
In conclusion, despite the tremendous rise of the United States stock market, investors are concerned over the potential market volatility. While the mixture of geopolitical concerns, policy uncertainties, and the rising tariff has incredibly boosted the need for downside hedging against the marketing moves.
The investors are trying to optimize with prudence, while some of them are busy shifting their strategies to protect against the tail event. It is stated that the market might experience the same conditions as in 2018, and it is now important to maintain a proper set of systems to manage the risk, which is essential for navigating the unsure economic and geopolitical outlook. Although the war between Russia-Ukraine and Israel-Hamas has influenced global trade negatively.
