Investors using Standard & Poor’s 500 Index futures turned bearish this month for the first time since September 2012, concerned that emerging-market turmoil and signs of slower growth will drag equities down.
Hedge funds and other large speculators have been net short for the last two weeks, wagering that the S&P 500 will decrease in value, according to data compiled by Bloomberg and the U.S. Commodity Futures Trading Commission. The Chicago Board Options Exchange Volatility Index, used to hedge against S&P 500 moves, rose above its average since 2012 last week as investors sought protection against a slide in stocks.
While markets have rebounded after $3 trillion was erased from global stock values at the end of January, hedge funds remain skeptical the S&P 500 can push to new records as the Federal Reserve withdraws unprecedented monetary stimulus and economic data misses forecasts. Political turmoil from Ukraine to Thailand and slowing growth in China have fueled concerns that emerging-market economies may tumble.
“Everyone made a ton of money last year being long and they may be hedging their portfolios in the S&P 500 futures market,” Eric Green, director of research and fund manager at Penn Capital Management, said by phone on Feb. 21. The Philadelphia-based firm oversees $7.5 billion. “The bad economic data and the emerging-market news that broke in January have all contributed to more negative sentiment.”
The S&P 500 surged 30 percent in 2013 for its best annual gain since 1997. The gauge tumbled 5.8 percent from a record on Jan. 15 as a rout in emerging-market currencies sparked concern that global growth would falter. The S&P 500 has rebounded 5.4 percent since touching a three-month low on Feb. 3.
The stock gauge closed at 1,836.25 last week, within 13 points of a record, while the CBOE’s VIX rose 8.2 percent to 14.68 for the shortened trading week after the Presidents’ Day holiday in the U.S. The VIX and the S&P 500 move in opposite directions about 80 percent of the time. It retreated 3.1 percent to 14.23 today.
The volatility gauge’s gain for the year is 7 percent and it has averaged 14.3 a day since the start of 2013.
“We’re seeing VIX call buying,” Mandy Xu, a New York-based equity-derivatives strategist at Credit Suisse Group AG, said on Feb. 20. “People are hedging against another selloff on concern over a possible growth slowdown globally.”
Seven of the ten most-owned contracts on the VIX were calls, representing bearish bets on stocks, according to data compiled by Bloomberg. March 23 calls had the largest ownership followed by options also expiring next month with a strike level of 20.
$5.6 Billion Bet
Bearish bets against the S&P 500 shrank to 12,085 contracts in the week ended Feb. 21. Based on the price of the futures contract, that amounted to a notional value of about $5.6 billion in bets against the index.
Investors were net long S&P 500 futures by 30,000 contracts on Jan. 10, for a swing of about 40,000 contracts in the past five weeks. That’s the biggest bearish move since August 2011, when hedge funds went from being net short 4,400 contracts to net short 107,913 contracts, according to CFTC data that started in 1997. That move preceded a 9.8 percent retreat in the S&P 500 as investors sold stocks amid Europe’s government debt crisis.
Bearish bets on the contracts reached an all-time high of 127,474 contracts in September 2007. The S&P 500 fell 57 percent from its 1,565.15 top in October 2007 to a 12-year low of 676.53 on March 9, 2009, during the worst financial crisis since the 1930s. The gauge has rallied almost 173 percent since.
S&P 500 futures change hands on CME Group Inc.’s Chicago trading floor as well as the exchange operator’s Globex electronic platform, which lets investors around the world buy and sell contracts on the benchmark measure for American equities. The futures are used to make short- and long-term wagers on the index and hedge other positions.
U.S. equity prices are justified by economic growth and corporate earnings and stocks may continue to advance, according to Ron Florance, the Scottsdale, Arizona-based deputy chief investment officer for Wells Fargo Private Bank.
“We’re actually pretty constructive on the near-term for the stock market,” Florance, who helps oversees $170 billion, said by phone last week. “We should be at an all-time high. Valuations I think are still appropriate.”
The S&P 500 trades at 17 times earnings, less than in previous bull markets. Valuations during the 2002-2007 rally averaged 18.8, and in the last two years of the 1990s, the average was 28.1, according to data compiled by Bloomberg.
Fed Chair Janet Yellen earlier this month said the economy has strengthened enough to withstand continued cuts to monetary stimulus, adding that only a notable change in the outlook for the economy would prompt the central bank to slow the pace of tapering.
Investors have dismissed worse-than-forecast U.S. economic data over the past two weeks, speculating that harsh winter weather explains the weakness in reports such as housing and hiring. The Bloomberg ECO U.S. Surprise Index, which measures how much recent data has beaten or missed economists’ estimates, fell to minus 0.429 last week, the lowest since August 2011.
“The action we’re seeing in futures is consistent with a corrective environment,” Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said by phone Feb. 21. “I’m not sure we’ve really finished with this correction. Sometimes, you get a rally, then the market goes down a second leg.”