6 Signs The Trump Trade Is Losing Steam

It's more expensive to buy short-term SPY calls than puts

Aug 24, 2017 at 4:08 PM
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The U.S. stock market has been seemingly unstoppable since last November's presidential election, with the Dow, S&P 500 Index (SPX), and Nasdaq Composite (COMP) carving out new peaks on hopes President Donald Trump would encourage pro-business reforms. More recently, the major market indexes have retreated from these record highs after a failed Obamacare repeal effort and increasingly divisive rhetoric out of D.C. As the Trump trade loses steam, here's a closer look at 6 signs skepticism toward stocks is growing.

  1. The latest Investors Intelligence (II) poll showed the number of bullish advisors fell 2.4% to 48.1% -- after hitting near record-high levels in the first half of 2017 -- while the percentage of bearish advisors edged up 0.2% to 18.3%. Meanwhile, the bulls-minus-bears line fell to 29.8%, breaching the 30% level for the first time since Nov. 15. This line was north of 40%, the level we typically consider to mark extreme optimism, just two weeks ago.

  2. According to Schaeffer's Quantitative Analyst Chris Prybal, the 10-day average of equity-only buy-to-open put/call volume on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) hit 0.685 last Friday, Aug. 18 -- the most elevated reading since Nov. 15. The ratio was docked at 0.674 on Wednesday, Aug. 23.

  3. Put buying across the S&P 500 Index (SPX), SPDR S&P 500 ETF (SPY), PowerShares QQQ Trust (QQQ), and iShares Russell 2000 Index Fund (IWM) is nearing levels not seen since February. Specifically, the cumulative 20-day buy-to-open put/call volume ratio across these exchanges is docked at 2.34, just off the Feb. 23 year-to-date high reading of 2.36. In fact, over this same time frame, put volume on these funds collectively rose by 27%, compared to a 6% increase in call volume.

  4. SPY's 30-day at-the-money (ATM) implied volatility (IV) skew hit 59.3% last Thursday, Aug. 17, the loftiest reading of the year, suggesting short-term calls are more expensive relative to puts. Plus, SPY put open interest hit a 52-week peak of 18.34 million contracts on Friday, Aug. 18.

  5. The Options Clearing Corporation's (OCC) all-exchange, equity-only 21-day option volume put/call ratio just rose to 0.98 -- the most elevated reading since Nov. 14. Earlier this month, the OCC's 10-day moving average for its put/call volume ratio on the "index/other" category, which measures cash-settled products, fell to a three-year low.

  6. Fund managers purchased record amounts of longer-term Treasuries at auctions earlier this month. Plus, call volume popped on the iShares 20+ Year Treasury Bond ETF (TLT) yesterday, with one options trader selling their September 126 calls to fund the purchase of the September 128 calls, which Trade-Alert indicates is part of a broader risk-reversal, or synthentic long, strategy with short September 123 puts, initially opened on June 24.
Nevertheless, stocks tend to climb on a "wall of worry," with these signals suggesting we still have yet to reach the "euphoria" stage associated with market tops. Plus, as Schaeffer's Senior V.P. of Research Todd Salamone noted in this week's Monday Morning Outlook, "the SPX is less than 2% below its all-time high with its bullish trend still very much intact." However, considering "equity option prices have imploded recently," according to Salamone, it's an ideal time to use options "to manage the perceived risk."


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