What follows is a portion of yesterday's premium note.
Almost exactly one month ago, the S&P 500 was trading at 2900. As we open September, the S&P 500 sits at 2906.
We have gone exactly nowhere over the course of one month.
All the meanwhile, we have seen a ratcheting up of every negative expectation one could have desired to witness over the past month. Everything from recessionary expectations with respect to the global economy, to the worst fears of a complete stalemate with U.S. and China trade talks. We have seen it all. The economic environment, at least from a headline perspective, has gone from hopeful to downright dreadful.
Of course, with pessimistic headlines, economic data and zero hope for a trade deal comes the accompanying pessimistic sentiment. Here is one illustration of how investors are dealing with the markets going nowhere while headline risk blows up. Investors are buying puts.
This is the 5 and 10 day moving average for the put/call ratio. Notice the ratcheting up of pessimistic sentiment expressed via put buying in early August that has sustained all the way up until today.
Investors are preparing for a worst case scenario into the fall months by buying insurance.
It's not just put options that are popular. Investors want insurance in numerous forms. Safe haven assets such as precious metals have become some of the best performers in the markets. And it's not just gold. Silver has taken on a parabolic trend to the upside in what is investors scrambling to catch up to what has been a missed opportunity to get into gold earlier this year.
In fact, it wasn't too long ago that we discussed silver being a catch up trade for investors, as the latter stages of metal bull runs see speculators piling into more and more volatile asset classes.
Investors are all-in on metals, with silver leading the charge, by far.
The only thing in the markets that looks remotely close to silver, other than gold obviously, is the ultimate safe-haven asset play: U.S. Treasuries. And it's not foreign countries or institutions that are leading the charge, as detailed in the Wall Street Journal recently, it is individual investors who are the biggest hoarders of U.S. Government debt at this point in time.
All the meanwhile, the S&P 500 is going nowhere.
Let's go over that last point one more time for clarity: Everyone is seeking safety in the face of a symphony of negatives and stocks are allowing investors a cushy exit, just a few percent off all-time highs. It's almost as if equities are trying to convince investors to cash in their plastic chips before they realize what they are holding is a lot more valuable than the headlines would suggest.
Investors are being bamboozled by a swirling torrent of negative news while the persistent bid that has been beneath the market for all of 2019 gobbles up their shares. This market should be down 10% plus off the highs in the face of everything we have seen transpire over the past month. As a matter of fact, everything we have seen in the aforementioned flights to safety is an expression of investor opinion that a 10% correction should have already been here.
At this stage there are only two camps in the market:
Camp 1 – They believe that everyone who has sought safety and bought protection is correct in expecting a 10% correction. The market is just delayed in getting there, allowing investors a comfortable exit all the meanwhile.
Camp 2 – They believe that the fact that the market hasn't succumbed to what has been a flood of negative news, in the face of bubbling pessimistic sentiment, constitutes a substantial positive divergence for equities. The markets are telling investors that they are much stronger than any headlines suggest.
Camp 1 or Camp 2? There really isn't much else to discuss.
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