EC Stock Market In A Good Mood

Recent weeks have brought significant sentiment improvement in equity markets. This was due, among other things, to several central banks' announcements of further monetary policy easing. Fed President Jerome Powell in his recent statements hinted that despite not bad economic data in the U.S., the central bank is likely to cut interest rates. Meanwhile, members of the European Central Bank have mentioned a few times that they will return to asset purchases if needed. This is important because we have a very high correlation between central banks balance sheets (blue line) and the S&P 500 index (red line), representing approximately 35% of global shares.

As you can see, with the amount of total assets increase for Fed, ECB, and Bank of Japan, prices of the main stock index in the U.S. have also increased. Let's have a closer look at the current market situation among different groups of investors.

High optimism among investors

Over the past week, hedge funds that follow macroeconomic trends and commodity hedge funds have been strongly involved in U.S. shares purchases. Their average net exposure increased from 25% short to over 50% long. The chart below shows that in the past such high long exposure usually meant stock market declines in the short term.

As you can see, this is one of the factors which shows that it is not the best time for investing in stocks. Next alarming signal is involvement in options of small investors.

Over a month ago, retail investors (this group is mostly wrong) bought over 3 million put options (options are gaining in value when stock prices are falling), or 26% of the total volume among this group of investors. What happened next? Stock prices have risen sharply. Currently, the same investors are intensively buying call options (options are gaining when share prices are increasing). Over the week, it was more than 4.4 million options, or 40% total volume of that investors group. For clarity, the greater share of call options in the volume, the greater optimism among those market participants. Therefore, as you can guess, in the past it meant drops of the S&P 500 index, which can be seen on the chart below.

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