To The Moon

Look no further than retail traders for a picture of pessimistic sentiment toward US equities, with bets on declines outnumbering wagers on gains by more than three to one.

Small-lot options traders -- those buying no more than 10 options contracts at a time -- snapped up $19.9 billion worth of puts to open last week while purchasing only $6.5 billion in calls to open, data compiled by Sundial Capital Research Inc. show.

“I don’t think people really appreciate what’s happening in the options market right now,” Jason Goepfert, the firm’s chief research officer, said in a tweet. “This is the first time in history that puts were 3x calls.”

Source: SentimenTrader via Jason Goepfert’s tweet

The massive shift in mood is indicative of the anxiety gripping Wall Street as global economy slows. Equity markets have seen volatile trading since the Federal Reserve launched its aggressive campaign to tamp down surging inflation, even at the risk of a recession. The S&P 500 has lost a quarter of its value this year while the growth-sensitive Nasdaq 100 is down 34%.

“There will come a point to slow rate hikes. The Fed is just not there yet, even if some other global central banks are,” Don Rissmiller, chief economist at Strategas Research Partners, wrote in a research note. “That leaves the possibility open of a financial crisis in coming quarters.”

And while several economists see inflation easing in the US, a key measure of consumer prices accelerated in September to a 40-year high. The core consumer price index, which excludes food and energy, increased 6.6% from a year ago to the highest level since 1982.

“It’s a bit of a perfect storm with growth being stronger than expected, inflation being hotter than expected, and the Fed implicitly responding to both,” Ed Hyman, founder and chairman at Evercore ISI, wrote in a note. “Despite another hot CPI, we’re still convinced that inflation is already cooling.”

By Isabelle Lee

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