Stocks Puke As Traders Rush To Hedge Downside

US equity markets are extending losses this morning, taking out yesterday’s lows and testing back down toward March lows…

As stocks catch down to the extremely hawkish reality priced into STIRs…

Bond yields are also tumbling and crypto is reversing alongside big-tech with Bitcoin back below $40k…

In fact, the only thing that is not falling right now is the cost of hedging downside protection as the put/call volume in stocks is soaring.

And earnings are not helping (with everyone ‘hoping’ that tonight’s mega-cap tech earnings will save the day…

“Earnings aren’t providing the relief some have been waiting for. At this point, the only thing working is hedging,” said Danny Kirsch, head of options at Piper Sandler & Co.

“Due to this demand for downside, you’re seeing skew increase, VIX invert, put volumes explode – everything you’d expect in extreme riskoff.” 

Of course, as Nomura’a Charlie McElligott noted yesterday, this somewhat extreme delta hedging and positioning sets the stage for a rebound from here with the world’s new greatest contrarian seeing the same signals:

“We see risks skewed toward a near-term equity rally given weak investor sentiment, low positioning, systematic strategy buying, seasonality, and oversold conditions,” JPMorgan’s Marko Kolanovic wrote in a note Monday.

“While we slightly reduced our record equity allocation, we remain constructive on equities.”

SpotGamma summarizes the situation perfectly: highlighting 5/4 as a major date as the FOMC and Russian default deadline occur on that day.

We anticipate these events to catalyze implied volatility leading to a substantial directional move. This is still 6 trading sessions away, and so markets are going to be subject to some wild swings but we see these swings as a function of simple put-heavy positioning. Dealers are going to short as the market drops and buy as the market rallies.

So how far will any rebound go?

However, as we noted yesterday, caveats for any ‘leg-into-bullishness’ here for a trade are of course: any further upside inflation surprises which risks more central bank hawkishness; and mega-cap Tech earnings and the risk they’d “kitchen sink” it.

We will know soon enough.