Market Is Shredding All the Time-Tested Ways to Chart Its Course

Options insurance. Hedging with Treasuries. Using sentiment to pick a bottom. The things that have lessened the pain of past equity selloffs are coming up short this time around.

Case in point this week, with its forceful pivot from multimonth lows. Sudden relief rallies have become the bane of would-be hedgers, who are paying dearly for bearish options in 2022 that often fail to deliver gains. A straightforward protection strategy of owning 5% out-of-the-money puts on the S&P 500 has lost almost as much as the index itself this year, thanks to the contour of the decline.

A chunk of the S&P 500’s loss was rolled back over the holiday-shortened week, with the index surging more than 6% as a report showed inflation expectations eased. Stocks are still stuck in a bear market after falling as much as 24% since January, weighed down by concern interest-rate hikes by the Federal Reserve will thrust the economy into a recession.

The year’s drubbing has left bulls bruised, but if picking a bottom when pessimism crests is your idea of sound trading, you’ve had your head handed to you repeatedly in 2022. Ultra-bearish readings in sentiment that used to be reliable buy signals are now luring people in for additional hammering. Also failing have been most attempts to seek protection in government bonds. Once a harbor against turmoil, Treasuries have served no such purpose of late.

“We’re really in unusual and unique times,” John Flahive, head of fixed income investments at BNY Mellon Wealth Management, said by phone. “One of the rationales for the breakdown of what traditionally would’ve been buffers is that interest rates were so manipulated at historical lows, and the adjustment period and the friction created from that change is what we’ve experienced here in the first half.”