U.S. Bull Run Losing Fans as Traders Load Up on S&P 500 Hedges

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With rallies in U.S. stocks falling apart on a daily basis, one measure of trader anxiety in the options market is flashing more pessimism than any time in six years.

Bearish puts on the Standard & Poor’s 500 Index outnumber bullish calls by the most since October 2008, with the ratio steepening amid a run of economic reports that trailed analyst forecasts, data compiled by Bloomberg show. Sentiment is deteriorating amid a stretch of volatility that has seen the benchmark gauge for U.S. equities erase annual gains six separate times in 2015.

With economic data missing the mark, analysts predicting three straight quarters of falling profits and speculation shifting about when the Federal Reserve will boost interest rates, investors are taking steps to protect profits after a six-year bull market added $16.5 trillion to stocks. A private report on Wednesday showed the smallest job additions in more than a year.

“People have a lot of gains over the last few years that they need to protect,” David Negri, an equity futures and options trader at Timber Hill LLC in Greenwich, Connecticut, said by phone. “There are a lot of cross-winds right now.”

Stocks are falling as economic data are missing forecasts by the most in six years, according to the Bloomberg ECO US Surprise Index. Employment climbed 189,000 last month, the smallest gain since January 2014, after a revised 214,000 rise in February, figures from the ADP Research Institute in Roseland, New Jersey, showed Wednesday.

Manufacturing Miss

The Institute for Supply Management’s manufacturing index declined to 51.5 in March, the weakest since May 2013, according to the Tempe, Arizona-based group’s data on Wednesday. The gauge fell five straight months, the longest such stretch since the end of 2008.

Stocks in the S&P 500 just completed the weakest quarter since a drop in the three months through December 2012, and investors withdrew more than $4.7 billion from an exchange-traded fund tracking the gauge in March. The index rose 0.4 percent to 2,067.32 at 10:39 a.m. in New York.

There were 7.6 million outstanding options protecting against U.S. stock declines as of March 31, more than twice the number of calls, data compiled by Bloomberg show. Nine of the 10 most-owned S&P 500 contracts were bearish, and puts hedging against a drop in the next six months were near their most expensive levels ever versus calls.

Rate Rise

Fed Chair Janet Yellen has said she expects an interest-rate increase this year, with gradual subsequent raises. With the European Central Bank beginning a quantitative-easing program, investors are shifting their asset allocations.

In March, they poured a record $4.8 billion into an ETF tracking European equities while hedging against currency swings, bringing the quarterly inflows to $10 billion. The Stoxx Europe 600 Index rallied 16 percent in the first three months of 2015, its best start to a year since 1998. And even with the worse-than-projected U.S. data on Wednesday, European shares rose as euro-area manufacturing grew more than initially estimated.

While U.S. equity swings remain below their five-year average, investors are betting on more to come: An exchange-traded note that profits with stock volatility received more than $500 million this year, the most money in six quarters. The additions came as the Chicago Board Options Exchange Volatility Index’s rebound last month marked its first March jump in 10 years.

“The U.S. economy seems to have gone through a bit of a slowdown,” said Didier Duret, chief investment officer of ABN Amro Bank NV’s wealth-management unit. “It’s very important to stay vigilant with what Yellen is doing. Even if she sounds very dovish at the moment, Fed members can change their minds.”

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