Gut-check days are piling up, even in a market that is about to end June roughly where it began. Add two more selloffs this week -- $800 billion tumbles on Wednesday and Friday that brought the number of days the S&P 500 has swung 2% or more this year to 38, on pace for the most since 1933.
Back is that nervousness investors feel each morning when checking the market. For now, the stunning rally that began in March has come to a halt, with the S&P 500 alternating between gains and losses for four weeks. Dramas are everywhere. From Robinhood day traders going head-to-head against veteran money managers to investors reviving the stay-at-home trade, conflicts are mounting, along with confusion.
The only thing that seems certain is the turbulence. Even with the S&P 500 stuck in a 250-point range in June, options traders have never been more active, betting on wider price swings. Between July’s earnings season to the presidential election in November, along with the ever-present risk of a virus resurgence, it’s recipe for prolonged chaos.
“Volatility like this could easily last another three to six months," said Yousef Abbasi, global market strategist at StoneX. “Until the more significant questions around Covid are answered, you have every reason to believe volatility will be elevated."
The S&P 500 dropped 2.9% over five days as Texas stopped steps to reopen its economy and new infections increased in Florida and Arizona. The Dow Jones Industrial Average lost 3.3% and the Russell 2000 Index fell 2.8% as investors reconsidered the recovery trade that has benefited cyclical shares like industrials and small-caps. With money flowing back to technology companies whose products enable working from home and automation, the Nasdaq 100 index outperformed, losing 1.6%, even as the Fang cohort suffered its worst day on Friday since the Covid crash.
Options traders are ramping up wagers on higher stock volatility. The number of puts and calls changing hands has averaged 31 million each day in June, poised to surpass the previous record of 29 million contracts reached in March, according to Options Clearing Corp. data compiled by Bloomberg.
The month started with a scramble by investors rushing to chase the rally. Options trading surpassed 45 million contracts on June 5, when the S&P 500 jumped 2.6% to cap a three-week, 12% advance. Retail investors, in particular, have been leveraging commission-free trading to scoop up beaten-down stocks in industries like airlines. Options have been their preferred tool.
That optimism got shaken on June 11 as signs of widespread virus infections in some states sent the S&P 500 down 6% in a single session. Demand for downside protection surged, sparking a similar spike in options trading.
“The upward trend has given away to volatility as they show signs about being concerned about risks to the recovery," said Jeffrey Kleintop, chief global investment strategist for Charles Schwab & Co. “There are worries tied to higher cases that could flow through to higher mortality. We haven’t seen it yet, but we’re at a critical point."
The Cboe Volatility Index, a gauge of options cost of the S&P 500 also known as VIX, has stayed above 25 in all but one session during the past four months, a run that eclipses any since the downgrading of the U.S. sovereign rating in 2011. During this stretch, the VIX averaged 40, double the historic average.
The caution has been justified by a roller-coaster year. After the pandemic drove stocks into the fastest bear market ever in March, the S&P 500 since surged as much as 44% in one of the biggest rallies in nine decades, boosted by stimulus measures and optimism over a swift economic rebound.
One potential source of volatility is the earnings season that kicks off in two weeks. Second-quarter profits for S&P 500 companies probably tumbled 44% from a year earlier, the worst since the 2008 financial crisis, analyst estimates compiled by Bloomberg Intelligence show. While bulls have taken comfort in the projection that this quarter would be the trough of the profit recession, any disappointment is unlikely to sit well with a market whose price-earnings multiples have expanded to a 20-year high.
Another market event down the road is the race that pits President Donald Trump against Democratic contender Joe Biden. The election has overtaken a second wave of virus outbreak as the biggest worry among institutional investors, according to a survey by RBC Capital Markets conducted earlier this month. Fear over the uncertainty is evident in the options market, with VIX futures contracts peaking in October, right before the Nov. 3 presidential vote.
Wall Street strategists are divided on the S&P 500’s fate in the second half of 2020. With the highest year-end target standing at 3,450 and the lowest at 2,700, the 28% gap is the second-widest at this time of a year since 2009, according to data compiled by Bloomberg. The forecast range implies a 15% upside and a 10% downside from the S&P 500 closing level of 3,009).
“To some degree it’s a function of what happens with the data, you know, do infection numbers plateau and start to improve?" said Phil Orlando, chief equity strategist at Federated Hermes. “We’re probably looking at a dozen different things and I have no friggin’ idea what’s going to happen."