3 Signs Investors Haven't Been This Nervous Since the Brexit

Despite a generally decent year, the stock market apparently hasn't done enough to dispel doubters

by Alex Eppstein

Published on Oct 19, 2016 at 2:50 PM

With the broad-market S&P 500 Index (SPX) up a solid if unspectacular 5% year-to-date, and a relatively upbeat start to earnings season, you might assume traders are generally feeling pretty good about stocks. But you'd be wrong. Based on several indicators we're seeing on the SPDR S&P 500 ETF Trust (SPY)CBOE Volatility Index (VIX), and elsewhere, there is a lot of unease among investors ahead of the U.S. presidential election, a November OPEC meeting, and the Fed's December meeting. Here are three charts indicating traders haven't been this nervous since the Brexit.

We'll start with the all-exchange, equity-only 21-day put/call volume ratio. According to Schaeffer's Quantitative Analyst Chris Prybal, this ratio recently rose to 0.94, suggesting a growing appetite for bearish bets over bullish. In fact, current levels are the highest they've been since the June Brexit vote. What's more, Prybal observes that over the past 20 sessions, buy-to-open (BTO) activity has risen 10% on puts while declining 13% on calls.

all exchange equity put call ratio october 19

This demand for puts over calls is reflected in options pricing, too. On the SPY, specifically, put options are still priced about 100% higher than calls after hitting a 2016 extreme in June, based on the 10-day moving average of the 5% out-of-the-money put/call skew. This echoes a recent observation we made on SPX options pricing.

Meanwhile, on the VIX, the 20-day BTO call/put volume ratio is fresh off a year-to-date high, hinting at mounting volatility expectations. Though, based on the chart below, the ratio has climbed much higher during various periods dating back to January 2013:

vix call put ratio october 19

Several sentiment surveys we track also reinforce a general skittishness among traders. In the most recent Investors Intelligence (II) survey, the bulls-minus-bears line dropped below 20% for the first time since late June -- again, right after the aforementioned Brexit vote. The line was recently near an annual high.

II bulls bears Oct 19



Finally, according to a survey of 213 fund managers by BofA-Merrill Lynch (BAML), global investors have upped their cash holdings to 5.8%, back to their post-Brexit highs. This came at the expense of bond allocations, which fell to 10-month lows. Moreover, the BAML survey said the top two risks among investors are potential eurozone disintegration stemming from Brexit (cited by 20% of those surveyed), and the potential of a Donald Trump presidency (17%).

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