MorningWord 5/3/17: Running of the Bulls

by Dan May 3, 2017 9:14 am • FREE ACCESS

Earlier over at The BoockReport, its author and economist extraordinaire Peter Boockvar highlighted the potential danger of bullish sentiment in the S&P 500:

According to II, Bulls rose to 58.5% from 54.7% and they said in response “the danger signal is in place” obviously referring to the contrarian nature of this indicator. We are back to near the 30 yr high touched on March 1st at 63.1% and that also happened to be the day of the closing record high in the S&P 500. All of those new bulls came from the Correction side as Bears remained unchanged at the microscopic level of 17.9%. I’m going to add some recently seen survey and market indicators to this. Over the weekend in the Barron’s Big Money Poll, there were only 9% of investors polled that were bearish vs 16% in the two prior surveys with 51% bullish and 40% neutral. The CNN fear/greed poll is just about exactly neutral at 51 (goes between zero and 100).

Last week’s AAII level of bulls was 38.1 which was a 9 week high and which came just one week after touching the lowest since November (I’ve told you how volatile this figure is). Bears are at a 5 week low. Let’s dig a bit deeper. The short interest in SPY’s is at the lowest level since May 2007. See chart. I’ll continue to say and I know you’re tired of hearing it but the biggest risk to markets is the Federal Reserve’s unwind of their extraordinary policy both in terms of rates and its balance sheet. It’s a rare time that it’s gone smoothly and hasn’t put us into a recession.

And of course the ECB is beginning to try the same thing at the same time.


The Federal Reserve is meeting today and isn’t expected to announce any changes to the Fed Funds rate at 2pm.  Fed Fund futures are only pricing a 13% chance of a rate increase (which is basically zero at this point) while June is pricing a 70% chance of a 25 basis point increase ( a near certainty unless we see some sort of geopolitical or market shock), only the Fed’s 4th such hike in ten years.

Equity Investors obviously don’t seem too bothered (see above). But looking at the options market we see how much traders are pricing in movement in the S&P 500 (via SPY options).  With the SPY closing just below $239, the June 239 straddle (the call premium + the put premium) went out offered at $6.40 or about 2.6% of the SPY’s price. If you were to buy the June at the money straddle because you thought the SPY could move more than 2.6% in either direction between now and the close of June 16th, then you would need to have a rally above $245.40, or a decline below $232.60 to make money.  That seems pretty reasonable, with the SPY about 1% from its all-time highs made on March 1st and the break-even on the downside very near its 2 month low from late March:


But this is a tough way to make money owning two-way premium, having to ait for a move or to scalp SPY stock to make up for the decay. Volatility readings this week are making 10 year lows. But picking a direction between now and June expiration, depending on one’s directional inclination, or desire for protection or leverage, just buying the at the money put or call is only implying a 1.3% break-even for more than a month. That wouldn’t take much of a move at all and could make sense for those looking to protect gains or define risk for any more upside.