Wall Street: Traders reduce hedging, ignore the Fed and the ‘’upcoming’’ recessionOct 25, 2022

Wall Street analysts see traders reduce hedging, ignore the Fed and the upcoming recession because of historic decline in stocks that affected both retail and institutional investors.

Wall Street analysts see that hedging is now difficult, because of the historic decline in stocks that have already wiped $13 trillion in market value this year and affected both retail and institutional investors.
In the options market, the relative cost of contracts that pay off if the S&P 500 sinks another 10% has collapsed to its lowest level since 2017. And the mood for bullish bets is on the rise. Cboe’s popular volatility index (VIX) is well below multiyear highs, even as stock benchmarks sink to bear-market lows. All of this may sound strange given that the Federal Reserve remains determined to make aggressive rate hikes as the risk of a recession is now visible. But traders are tired of repeating the same bearish mantras.

This does not mean that traders are optimistic since equity exposures have already fallen to historic lows while rising inflation and aggressive monetary policy are on the run. The chart of VIX compared to the S&P500 is still hovering near 30, reflecting expectations that stock prices will swing more than normal in these uncertain times. However, given historical inflation and the scary outlook for interest rates, it could be much higher, and this poses no new threats. The reasoning goes that the need for downside hedges is reduced.

Wall Street: Traders reduce hedging, ignore the Fed and the ‘’upcoming’’ recession. VIX vs. SP500 Monthly Chart
VIX vs. SP500 Monthly Chart

With cash on the sidelines, some investors are drawn to the idea that most of the bad news has passed and favorable seasonal patterns may yet come into play. Since 1990, the three-month period beginning Oct. 10 has given the S&P 500 an average gain of 7%, according to data. On a rolling basis, this is the strongest quarterly trading window of the entire year. Hence, the perception is that while we’re not there yet, we may be one step closer to finding the optimal bottom.

From an Elliott Wave perspective we are tracking two counts down on SP500, away from all time highs.  First one below shows a zigzag with wave C now boucing from the supports, but we will need an impulse to 4200 to make sure that lows are in.

Wall Street: Traders reduce hedging, ignore the Fed and the ‘’upcoming’’ recession. SP500 Daily Count 1
SP500 Daily Count #1

If rally is going to be in three waves, then this can still be only wave B of a complex W-X-Y. Somehow, we really love the second count, especially if we consider that “real shock” can still before low is formed. Lows on stocks are normally visible through sharp spikes. Keep in mind that on VIX there is still a chance for a phase #3; the “shock”.

Wall Street: Traders reduce hedging, ignore the Fed and the ‘’upcoming’’ recession. SP500 Daily Count 2
SP500 Daily Count #2
Wall Street: Traders reduce hedging, ignore the Fed and the ‘’upcoming’’ recession. VIX Weekly Chart
VIX Weekly Chart

by Grega Horvat and Stavros Chanidis

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