Short bets on the S&P 500 are soaring, and the price of the index has dropped for days. Has the day short investors have been waiting for finally arrived? Bloomberg reports:
Whatever happens in Ukraine or how it affects Federal Reserve policy, the outcome will land in markets where investors have had time to prepare for the worst. It may be one reason the worst has so far been avoided.
They’ve been steadily boosting bets against equities, shaking off a reluctance to short tracing to last year’s meme stock upheaval. Bearish bets on the largest exchange-traded fund tracking the S&P 500 have surged, while put open interest on bond-focused products has risen to historic levels. Meanwhile, professional managers have been hedging their credit exposures.
The process, undertaken when the Fed started to indicate it was serious about taming inflation, is starting to look fortuitous with tension building around Russia and Ukraine. Equity markets proved resilient overnight, shaking off a decline in futures that at one point reached nearly 3% on the Nasdaq 100 Index.
“When markets are at record highs, there’s a lot of room for downside movement,” Randy Frederick, managing director of trading and derivatives for Charles Schwab, said by phone. “I would think that might diminish the impact of this.”
Investors have been on edge for weeks as Russia’s troop buildup along its border with Ukraine escalated, with the White House warning an invasion could be imminent — something Moscow denies. A constant barrage of news bulletins have added to the agitation, with the Biden administration’s aggressive rhetoric on Russia becoming a focal point for traders.
Short interest as a percentage of shares outstanding in the SPDR S&P 500 ETF Trust (ticker SPY) has doubled since the start of the year, last week reaching the highest since December 2020, according to data from IHS Markit Ltd. More than 6% of the fund is now out on loan.
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