To The Moon

As a short squeeze rally drives U.S. indexes significantly higher, UBS's proprietary trading desk has issued a warning: the rally has gone too far, and investors should consider scaling back their positions. According to UBS’s proprietary indicators, despite the market's apparent strength, true risk appetite is actually declining.

Rebecca Cheong, Head of Flow Trading at UBS, noted in a newly released report that although there has been a sharp short-covering rebound (with the UBXXSHRT short squeeze index rising 43%), UBS's proprietary “4M Intraday Recovery Score”—which measures discretionary risk appetite—has been falling, turning neutral as of June 18.

Based on historical data, under similar short squeeze and risk appetite conditions, the S&P 500 typically falls by 11% and the Nasdaq by 13% within three months.

At the same time, the market is facing multiple headwinds, including upcoming pension rebalancing sales and a sharp drop in corporate buybacks. UBS recommends investors consider trimming their equity positions.

UBS's bearish view is further reinforced by liquidity signals:

1. Persistent Outflows from Active Funds:
UBS’s monitored retail investor flows (RMM Flow) show that in 4 out of the past 5 trading days, there were net outflows. Similarly, foreign investor flows through U.S.-listed ETFs also posted net outflows on 4 out of 5 days.

2. Institutional Selling Pressure Looming:
UBS estimates that quarter-end rebalancing by pensions and target-date funds will trigger up to $56 billion in global equity sales (with bond purchases offsetting), including $31 billion in international equities and $25 billion in U.S. equities.

3. Weakening Buyback Support:
Corporate share repurchases—once a key source of support—are also set to decline. UBS expects buybacks to fall to $30 billion next week, and to $15–20 billion per week before early August, as firms enter their buyback blackout periods.

JPMorgan: Recession Risks Rising

On Wednesday, JPMorgan analysts warned that U.S. trade policies could slow global growth and reignite domestic inflation. They now assign a 40% probability to a U.S. recession in the second half of this year.

In a mid-year outlook report, JPMorgan revised its 2024 U.S. GDP forecast to 1.3%—down from 2% earlier this year. Rising tariffs are seen as a key downside risk.

The report states:
"The stagflationary shock from higher tariffs is the main reason we've downgraded our GDP forecast. We continue to believe that recession risks remain elevated."

Stagflation—the combination of sluggish growth and stubborn inflation—last plagued the U.S. in the 1970s.

JPMorgan is bearish on the U.S. dollar, citing slowing domestic growth while policy support abroad helps bolster foreign and emerging market currencies.

With U.S. Treasury supply rising, the bank expects lower demand from foreign investors, the Fed, and commercial banks. As a result, the term premium—the extra yield investors demand to hold long-term U.S. debt—could rise by 40–50 basis points. However, they do not expect yields to spike as sharply as earlier in 2024.

After Trump announced sweeping new tariffs in April, markets became volatile and Treasury yields surged. JPMorgan now projects the 2-year Treasury yield to reach 3.5% and the 10-year yield to hit 4.35% by year-end. On Wednesday, those yields were approximately 3.8% and 4.3%, respectively.

Given sticky inflation from tariffs and resilient economic activity, JPMorgan expects the Fed to cut rates by 100 basis points between December 2024 and spring 2026—later than the consensus among rate futures traders, who as of Wednesday were pricing in two 25-bp cuts this year.

JPMorgan analysts say that a deeper-than-expected slowdown or recession could trigger a more aggressive easing cycle.

Despite this, they remain constructive on U.S. equities, citing economic and consumer resilience, even amid policy uncertainty.

Options-Based Hedging Strategies

Given the current market backdrop—with stock valuations at or near historical highs—it may be an opportune time to implement short strategies via options. These can help capture downside opportunities while managing systemic risk.

Compared with short selling, options offer several advantages:

• Limited Risk: Buying puts caps maximum loss at the premium paid—unlike short selling, which has theoretically unlimited downside.

• Leverage: Options require relatively little capital and can amplify returns on directional moves.

• Flexibility: Traders can tailor strategies (puts, spreads, straddles, etc.) for different market volatility scenarios.

Below are several commonly used bearish options strategies suited for the current U.S. market environment:

1. Protective Put

Strategy: Investors holding stock buy puts to hedge against downside.

When to use:
You’re bullish long-term but worried about short-term pullbacks.

Example:
Own SPY (currently ~$607). Buy a SPY 580 put expiring Sep 2025 for ~$12.
If SPY drops to 560, the put rises to ~$20, providing ~$8/share in protection after deducting premium.

2. Collar Strategy

Strategy:
Sell a call and use the premium to fund a protective put—resulting in near-zero-cost downside protection.

When to use:
You seek downside protection and are willing to cap your upside.

Example:
Own AAPL (currently ~$201.6).

• Sell Sep 2025 $225 Call for ~$2.25

• Buy Sep 2025 $175 Put for ~$5
  Net cost: ~$2.75, partially offset by call premium.
  Upside capped at $225; downside protected below $175.

3. Index Put Hedge (Beta Hedge)

Strategy:
Buy puts on indexes like SPX, QQQ, or IWM to hedge a portfolio that correlates strongly with them.

When to use:
You hold diversified stock positions and worry about systemic risk.

4. VIX Options or ETFs

Strategy:
Exploit the inverse correlation between the VIX and equity markets.

When to use:
You expect short-term volatility spikes due to black swan risks.

Example:
VIX at ~16.8. Buy a Jan 2025 $20 VIX Call for ~$1.
If VIX spikes to 25+, call value could surge to $6–10.

5. Put Spread (Bear Put Spread)

Strategy:
Buy a higher-strike put and sell a lower-strike put to reduce net cost, limiting both profit and loss.

When to use:
You expect a moderate market decline and want to control costs.

6. Single-Stock Bearish Options (Targeting Bubble Stocks)

Strategy:
Use Bear Call Spreads or long Puts on overheated names like TSLA or NVDA to hedge potential valuation corrections.