Investors are spending fresh billions hedging market mania: Experts

Gold and longer-maturity bonds are getting outsized inflows. Protective equity options are outdrawing speculative contracts, while volatility markets are positioning for fresh disruptions.

Whether it’s a bearish portent of a sell-off to come or prudent hedging after a fierce stock rebound, traders are bolstering their defenses against an end to this vertiginous rally.

Gold and longer-maturity bonds are getting outsized inflows. Protective equity options are outdrawing speculative contracts, while volatility markets are positioning for fresh disruptions.

It comes as signs of froth are emerging. The S&P 500 Index is on the cusp of its best quarter in more than 80 years even as fears of a second coronavirus wave grow. Speculative mania reigns among retail investors, while the likes of JPMorgan Chase & Co. are turning bullish on U.S. stocks.

But for all the fears that Wall Street is running headlong into risk in one of the fastest rebounds ever, hedging demand shows the frenzy is being met with some vigilance.

Yellow Metal

Net bullish bets on gold in futures and options have risen for the first time in four weeks, recovering from a one-year low, Commodity Futures Trading Commission data showed on Friday. The SPDR Gold Shares, the world’s biggest exchange-traded fund holding bullion, took in the most in about a year at $1.3 billion on Friday. Overall, gold ETFs boosted their holdings by almost 30 tons, a sign of enduring faith in the defensive asset.

One reason: bulls keep finding their faith rewarded, with the price of bullion edging toward the highest since 2012.

Covid-19: Investors bullish on US stocks, but doubt looms despite rally

After a slump into bear market territory, the Dow Jones Industrial Average surged over 20% from its recent low last week, which by one definition suggested a new bull market.

After a brutal meltdown, some investors have been wading back into U.S. stocks. But others are wary of another leg down as the coronavirus spreads and its economic impact is difficult to predict.

High-profile investors from BlackRock Inc to billionaire William Ackman have turned more bullish on equities in recent days, as unprecedented stimulus from the Federal Reserve, a $2.2 trillion stimulus bill signed Friday, and a call by President Donald Trump to get the United States back to work in weeks rather than months sparked the biggest weekly rally in the Dow Jones Industrial Average since 1938.

But other investors, economists, and strategists are fearful of advising a jump back in, with no certainty about when the coronavirus outbreak will be under control.

"People are trying to time the bottom and that's indicative of an early bear market, when people have hope," said Richard Bernstein, chief executive officer of Richard Bernstein Advisors. "The beginning of a bull market starts with complete despair, when you've killed hope."

Bernstein said he was a "data hawk" and was looking for a combination of "improving fundamentals" - eyeing the basic health of the asset, rather than trading patterns - and "total disbelief," adding that in 2009 investors did not believe the bull market was real.

After a slump into bear market territory, the Dow Jones Industrial Average surged over 20% from its recent low last week, which by one definition suggested a new bull market. That definition, however, should be treated with significant caution.

BofA said on Friday that its Bull & Bear Indicator - a key market measure used to track positioning - had hit "maximum bearish," which could imply a rebound. However, that could have been borne out by the rally seen in the past week.

Ackman, whose Pershing Square LP fund gained a net 6.8% this month according to one investor, wrote to investors last week to say he had taken off credit market hedges and invested the money in new and existing stock holdings after turning "increasingly positive" on stock and credit markets.