Dividend Backlash Intensifies in Options Market as S&P 500 Slips

  • Prices for protective contracts close to highest in four years
  • High-yielding stocks just ended a rare losing month in August

More evidence the world is kicking its dividend addiction has surfaced in the options market.

Relative to the biggest S&P 500 Index tracker, investors are paying close to the most in four years to protect against losses in the $16 billion iShares Select Dividend ETF, according data compiled by Bloomberg. The ETF, which has climbed 16 percent in 2016, fell in August for its first monthly drop since January, losing 1 percent. The S&P 500 slipped 0.2 percent to 2,181.30 at 4 p.m. in New York on Thursday.

Any evidence that investor ardor for defensive companies is waning should be viewed bullishly, according to Michael Antonelli of Robert W. Baird & Co. This rotation can be seen with technology shares at a 16-year high, and the biggest energy ETF absorbing the most cash in 16 months.

“For the longest time, one of the most crowded trades was this dividend play, and you’re seeing some unwinding of that,” said Antonelli, an institutional equity sales trader and managing director at Robert W. Baird in Milwaukee. “That should be viewed as a good thing. Sectors like tech are what you like to see lead if the market is going to make another leg up.”

The six-month implied volatility spread between the iShares dividend ETF and the SPDR S&P 500 ETF sits just half a point from a more than four-year high reached in May, according to data compiled by Bloomberg. The two biggest components of the dividend fund, which tracks the stock market’s highest-yielding companies, are Lockheed Martin Corp. and CME Group Inc.

While the iShares dividend ETF has taken in more than $1 billion this year, the pace of inflows has slowed. It’s absorbed just $17 million since the start of August, including $22 million of outflows over the past five trading days, Bloomberg data show.

Very little is working in the stock market right now. The S&P 500 has wandered in a 1.5 percent range for 40 days, the narrowest ever for such a period. The elite dividend group has lagged the benchmark gauge by a full percentage point over the period.

Stocks Slip

U.S. stocks slipped from near-record levels Thursday after European Central Bank President Mario Draghi downplayed the need for more stimulus measures to bolster growth. Apple Inc. was the biggest drag, falling the most in two months, a day after the introduction of its latest iPhone. Tractor Supply Co. tumbled 17 percent, the biggest drop in 16 years after cutting its profit outlook. Energy producers rallied for a fourth day as the price of crude surged on an inventories report.

A Goldman Sachs Group Inc. basket of most-shorted shares also rose for a fourth session, the longest winning streak in a month. The S&P 500’s drop left it 0.4 percent from an all-time high reached Aug. 15. The Dow Jones Industrial Average lost 46.23 points, or 0.3 percent, to 18,479.91, 0.8 percent from a record. The Nasdaq Composite Index slipped 0.5 percent after closing at a high Wednesday. About 6.7 billion shares traded hands on U.S. exchanges, in line with the three-month average.

“The decision to not extend QE and some of Draghi’s other commentary is being taken as hawkish,” said Antonelli. “To leave policy unchanged was a little surprising. At the high end of this range, there’s no catalyst for a breakout, so we’re selling on this news.”

The S&P 500 has hovered near a record since mid-August amid mixed economic data and speculation about Federal Reserve interest-rate policy. The stock market has been one of the calmest ever as traders pushed back bets for a September hike to 28 percent, from as high as 42 percent in late August. December is the first month with at least even odds of a raise.

A report today showed filings for unemployment benefits dropped to the lowest level in seven weeks, showing employers have little appetite to fire workers. Yesterday, the Fed’s Beige Book survey of regional conditions indicated the economy grew at a modest pace in July and August. That followed recent weaker-than-expected gauges on services-sector activity, manufacturing and hiring.

In Thursday’s trading, energy shares in the S&P 500 surged 1.7 percent to the highest since November. Chesapeake Energy Corp. rallied almost 14 percent to the highest since October, while Apache Corp. added 7.1 percent. Crude jumped 4.7 percent after the biggest drawdown in U.S. inventories in 17 years, as Tropical Storm Hermine last week disrupted shipping and output in the Gulf of Mexico.

Apple’s drop weighed on technology companies after the group closed yesterday at the highest since September 2000. International Business Machines Corp. lost 1.6 percent, the most in two months, and Oracle Corp. decreased 1.3 percent.

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