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    Rally riches too tempting to abandon

    Synopsis

    Trade war anxiety may be running high, but it’s hard to see it in closing prints.

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    Part of that is the belief that the US and China will strike a deal sooner or later.
    Need a reason to sell? There’s plenty. Seduced by prospects for a big year, a lot of stock investors don’t want to hear them.

    While drops like Monday and Friday are getting common, just as notable has been the S&P 500’s resilience. Consider the last two weeks, when five times the index has clawed back more than half of its overnight losses. Instead of bailing, traders are splurging on hedges. Volume in bearish puts is jumping.

    Trade war anxiety may be running high, but it’s hard to see it in closing prints. Traders awoke with futures in the red every day this week only to watch them finish higher in all but two. Headlines roiled stocks globally but did little to chase US investors from what is still among the best starts since 1987.

    “No one wants to give in,” said Matt Maley, equity strategist at Miller Tabak + Co LLC. “Can it be dangerous? Of course. The stock market isn’t listening to anyone. There is a high risk that this technical bounce from oversold position will roll over.”

    This week, after traveling 91 points between a low of 2,801 on Monday and a high of 2,892 Thursday, the market finished the five sessions 0.8 per cent lower, even as Chinese equities fell for the fourth time. After closing at a four-month high on Monday, the Cboe Volatility Index declined three of the next four days.

    Monday was one of the worst sessions of the year, with the S&P 500 dropping 2.4 per cent on news that Beijing will retaliate with higher Chinese tariffs. But as traders in Asia and Europe braced, US investors jumped in to to buy the dip.

    All told, the S&P has on average fallen 0.5 per cent overnight and gained 0.2 per cent during the day since the trade spat re-erupted two weeks ago. That gap is the biggest disparity since July 2009, data compiled by Bloomberg show.

    “If we get that next wave of negative indicators about ‘the US and China are irrational, we can’t deal with them,’ then we’ll see some kind of pullback,” said Mariann Montagne, portfolio manager at Gradient Investments. “But at some point this year, I do think they’ll come to some mutually agreeable decision and we’ll get the earnings growth and the market expansion based on that alone.”

    The willingness to push stocks up every time they fall reflects a widespread belief that no swoon will stick. Going by data released by the Conference Board in its consumer confidence assessment for May, the share of Americans who expect equity prices to decrease is currently the lowest since October.

    Part of that is the belief that the US and China will strike a deal sooner or later. But while most strategists don’t see a full-blown trade war as their base-case scenario, they warn about significant risks to markets should the worst come true. A permanent increase in tariffs on Chinese goods will shave $4 to $8 from the S&P’s next year’s per-share earnings, according to Sanford C. Bernstein. It will send the S&P to 2,550, says JPMorgan Chase & Co.

    Investors are taking precautions. Hedge funds boosted bets against equities, data compiled by Morgan Stanley’s prime brokerage unit showed last week. At Goldman Sachs, fund clients increased shorts through ETFs while snapping up single equities. A record 34 per cent of investors surveyed by Bank of America Corp. said they’ve purchased protection against a sharp drop in stocks over next three months.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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