By Justina Lee and Vildana Hajric
If euphoria was the concern, you can stop worrying.
With books now closed, the S&P 500 has formally delivered its worst May return in seven years and second-worst since the 1960s, falling 6.6 per cent. For tech traders watching the Nasdaq 100, the experience was only a shade less harrowing than the crash months of October and December.
Peace has been shattered, and for now, those voices calling for a 1990s-style melt-up have gone silent. As the US-China trade spat escalates further and Donald Trump threatens higher tariffs on Mexican goods, this months $4 trillion global plunge is making dip-buying perilous.
“Clearly theres potential for further downside,” Steve Chiavarone, a portfolio manager with Federated Investors, said in an interview at Bloombergs New York headquarters. “For markets to really rebound, I now need positive clarity on China, Mexico, politics in general and the Feds probably going to have to do something. Thats an awful lot to ask for.”
The list of May casualties is long. All but one of the 11 S&P 500 groups fell, with real-estate shares getting a boost as the 10-year Treasury yield plunged to a 20-month low. Chipmakers exposed to China got hammered, sending the Philadelphia Semiconductor Index down 17 per cent for its worst month since the financial crisis. Technical support levels cracked as the S&P 500 sank through its 50-, 100- and 200-day moving averages for the first time in months.
Echoes of the mayhem from December abound, from erratic bets on volatility to the boom in hedging and the surge in defensive trading.
The Treasury market has delivered the most ominous signals in recent weeks. A 37 basis-point plunge in the 10-year yield took it below the level of three-month rates, inverting a key part of the yield curve by the most since 2007. While declining bond yields initially buoyed valuations in the first quarter, theyre now ostensibly reflecting deteriorating growth prospects that are bringing down equity multiples.
While lower valuations can boost the allure of equities relative to bonds, the prospect of a prolonged global trade conflict is an ever-present threat to corporate earnings and risk appetite.
“There needs to be a clear catalyst” for stocks to rebound, said Edmund Shing, global head of equity derivative strategy at BNP Paribas SA in London. “A US-China trade deal could be one, but this is not our central scenario. The hardening of positions will be difficult to step back from, in the short term at least.”
The uncertainty is reflected in the options market. While S&P 500 swings have remained relatively subdued this month, the VIX hasnt bounced around this much since November. In fact, the Cboe Volatility Index spent time both above 21 and below 15 during two different weeks in May, something thats never happened in the same month, according to data compiled by Twitter user OddStats and Bloomberg.
“A month ago the stock market was not only pricing in a trade deal with China, but the Iran issue wasnt a problem, Brexit didnt look that bad. Suddenly all of these issues are on a table,” Matt Maley, equity strategist at Miller Tabak & Co.
Its not all doom and gloom, say the bulls. Crumbling sentiment, demand for safer companies and bonds that are sending terror alarms create the climate for contrarians.
Cboes composite put-to-call ratio, which tracks outstanding options to sell stocks versus those to buy them, jumped to the highest since Decembers record on Wednesday. Prior jumps “occurred near tradeable lows,” Jonathan Krinsky, technical analyst at Bay Crest Partners, wrote in a note.
Meanwhile, one US metric of the relative bullishness of individual investors has plummeted — a potential sign of a trough given the ensuing rebound when it notched similar levels late last year.
This “gives us some confidence that things in the short term arent nRead More – Source