Stocks Are Doing So Well That It May Be Time to Start Worrying

US stock market traders are almost completely fearless now, which has some strategists bracing for a possible selloff.

The S&P 500 Index has gained 19% this year, pushing investors off the sidelines and into the market. Traders’ stock exposure is historically high, in the top 28% of all time, according to Deutsche Bank’s analysis of rules-based and discretionary strategies going back to 2010.

Few, however, seem worried enough to hedge. Buying protection against dips in the options market is the “cheapest you likely have ever seen,” Bank of America strategists wrote in a Tuesday note. The trading volume of call options, used to wager on the market rising, outpaced puts earlier this month by the most since December 2021.

But there are reasons to be worried. The Federal Reserve is looking to engineer a soft landing after a period of inflation and intense rate hiking, an effort that’s rarely successful. On top of that, September and August tend to be the S&P 500’s worst two months of the year.

“Bullish sentiment and weak seasonality have made our contrarian antennas tingle a little bit,” said Jeffrey Hirsch, editor of the Stock Trader’s Almanac, who correctly forecast the rally after the financial crisis. “All the bears that came off the sideline are chasing this momentum and the ‘FOMO’ players are all in now, so that means it’s time to see this rally pause.”

Surging Demand for Calls